The Strategy Analytics Toolkit - Tistory

The Strategy Analytics Toolkit - Tistory

DRAFT The Strategy Analytics Toolkit Gemini Consulting Beta Version: October 1998 DRAFT Contents Introduction - what it is, and what it isnt Geminis Approach to Strategy: Strategy and Results Understanding a Clients Strategic Position Analytics to Understand a Clients Strategic Position About the Toolkit Structure and Contents Page 3 9 35 Toolkit Analytics: Competitors/Industry Stream Analytics Customer Needs Stream Analytics Profitability Stream Analytics Capabilities Stream Analytics Developing and Evaluating Options 39 113 159 206 226 Next Steps and Feedback Process Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm 247 -2- Introductionwhat it is, what it isnt INTRODUCTION The Toolkit describes key analytics used by Gemini in strategic work with clients DRAFT Designed for use by all Gemini consultants: Most frequent users are likely to be strategy consultants. However, we hope that project managers, business development staff, and consultants from other disciplines will find it a useful reference tool. Contains analytics that, in our experience, are the most relevant and useful for strategy work: Analytics and content developed in consultation with all Gemini POAs. Does not deal with the process of how to engage the client organisation to achieve the desired outcomes: This topic is addressed in more detail by the LMR a discipline Kbase. See also Geminis Evolving Change Model, on Gemini Compass. Does not provide tools or frameworks to understand the emotional and political domains. The Thetoolkit toolkitis isintended intendedas asan anaide aidememoire, memoire,and andwill willsupplement supplementGemini Gemini strategy training programmes. strategy training programmes. a. Leadership Mobilisation and Renewal. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm -4- DRAFT INTRODUCTION The Toolkit draws on Geminis heritage United Research 1991 Mac Group 1991 Bossard 1998 SIAR 1998 Eurostart 1994 Svennerstal & Partners 1996 IKO (Norway) 1991 Asia Advisory Services 1991

Gamma International 1991 CESAT 1995 GTP 1993 With Withthe theToolkit, Toolkit,we wehope hopeto tobuild buildaacommon commonlanguage languageamong amongall allGemini Gemini consultants around fundamental strategic tools and techniques. consultants around fundamental strategic tools and techniques. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm -5- DRAFT INTRODUCTION The focus of the toolkit is on core analytics Strategy Development & Planning for Growth (J. Schmidt) Growth Growth Strategy Strategy Value Value Innovation Innovation Vision Vision Engineering Engineering Strategic Strategic Intent/Core Intent/Core Competencies Competencies Corporate Corporate Strategic Strategic Planning Planning Transformation Transformation Mapping Mapping Partnering & Managing Capabilities (TBD) Acquisition Acquisition Screening Screening Alliance Alliance Management Management Joint Joint Ventures Ventures Applied Applied Knowledge Knowledge Management/Perfor Management/Perfor mance mance Innovation

Innovation Post Post merger merger integration integration Strategic Marketing (A. B. de Jaegere) Segmentation/Data Segmentation/Data Warehousing Warehousing Marketing Marketing Effectiveness Effectiveness Customer Customer Value Value Management Management (CVM) (CVM) Channel Channel Strategy Strategy and and Management Management Market Market Focus/BMFO Focus/BMFO Sales Sales Effectiveness/ Effectiveness/ Pricing Pricing Guiding & Measuring Success (M. Tattum) Balanced Balanced Scorecard Scorecard Shareholder Shareholder Value/ Value/ EVA EVA Activity Activity Based Based Management Management (ABM) (ABM) Corporate Corporate governance governance and and multi-business multi-business role role of of the the centre centre and and organisation organisation Link to IM Strategy Link to Organisational Design Strategy Competency Group Structure Core Strategy Analytics Toolkit Focus Industry/competitor Industry/competitoranalysis analysis Profitability Profitabilityanalysis analysis Capabilities Capabilitiesanalysis analysis Customer Customeranalysis analysis Option Optionformulation formulationand andevaluation evaluation The Thestrategy strategycompetency competencygroups groupsprovide

provideaastructure structurefor forknowledge knowledge management. management. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm -6- DRAFT INTRODUCTION Strategy competencies will be built-up from core consulting and strategy skills Strategy Competency Group Overview Partnering Partnering&& Managing Managing Capabilities Capabilities Strategy Strategy Development Development &&Planning Planningfor for Growth Growth Strategic Strategic Marketing Marketing Core Strategy Analytics (Tools & Frameworks) Toolkit Gap filled by toolkit PoA based training to be developed Covered at GU and project based learning Core Strategy Skills Analytical Problem Solving Process Core Consulting Skills Guiding Guiding&& Measuring Measuring Success Success Covered at GU E.g.: Presentations Covered at Interviewing Induction, GSW and Researching PoA based training Modelling 6 months Etc 1 year Time with Gemini The Thetoolkit toolkitplugs plugsaakey keyexisting existinggap. gap. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm -7- DRAFT INTRODUCTION The toolkit supports each stage of the Analytical ProblemSolving Process Analytical Problem-Solving Processa Develop DevelopConclusions Conclusions &&Recommendations Recommendations Develop DevelopInsights Insights Analyse AnalyseData Data Gather GatherData Data Define DefineIssues Issues What is the stated issue? Are there more fundamental ones? What is the actual strategic position?

What supplementary What evidence do we analysis do we need Form FormHypotheses Hypotheses need to to do? confirm/refute the hypotheses? What do we believe the strategic position What analysis will to be? we do, and what data should we collect? What are the boundaries of the businesses? What are the drivers of value? How are we positioned? Main Toolkit Help What are the options? What might we do? What is the situation? What are the options to resolve the issues? How can the situation be improved? Which option should your clients select? How should they implement it? What are the risks? How can they be overcome? How can they measure progress? The TheToolkit Toolkitis isparticularly particularlyhelpful helpfulin inunderstanding understandinghow howto togather gatherand and analyse data. analyse data. a. See Gemini University Strategy Skills Course for further details. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm -8- INTRODUCTION In any business, there are different levels for which we develop strategy (and vision) DRAFT Strategy Analysis Pyramid Vision Goals Corporate Strategya Business Strategy Toolkit Focus The Thetoolkit toolkitfocuses focuseson onbusiness businesslevel levelstrategy, strategy,the thekey keybuilding buildingblock. block. a. Defined as multibusiness. See also corporate level strategy initiative document in German POA, and Koch Training Sessions in South African POA. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm -9- DRAFT INTRODUCTION We must be aware of some important caveats . . . The toolkit is not a cook book. Blind application of many of the analytics could lead to the wrong, or indeed no answer: Analysis, particularly the output, needs guidance and thought. There is no substitute for experienceboth in strategy and industry knowledge: The only way to truly develop strategy skills is through an apprenticeship model. There is an appropriateness of robustness for all analysis: Analytics can be used with different levels of data, for different situations, e.g. business development, A&D, and RD. Strategic position changes and an industry shifts:

It is easy to get stuck in an old paradigm, leading to wrong assumptions and solutions. Beware of accepting industry assumptions without challenging and seeking evidence. Challenge the status quo by testing the feasibility of the complete opposite of existing industry modus operandi. ......and anddont dontforget forgetcreativity. creativity. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 10 - Geminis Approach to Strategy Strategy and Results Understanding a Clients Strategic Position Analytics to Understand a Clients Strategic Position DRAFT STRATEGY AND RESULTS Gemini is in the business of helping our clients improve business performance and delivering results Three Key Levers For Improving Business Performance Longer Term Unique Capabilities and Assets Strategic Position (Toolkit Focus) Operational Effectiveness Shorter Term An Aneffective effectivebusiness businessstrategy strategyfocuses focuseson onimproving improvingthese thesethree three fundamentals. fundamentals. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 12 - STRATEGY AND RESULTS Geminis strategy is about the right results not just the right answer DRAFT Characteristics Required for Strategic Success Robust and creative strategy that can be implemented Strategic actions embedded in day-to-day business Organisational understanding, momentum, and enthusiasm Capability to adapt and evolve strategy as market and industry develop Results Resultsare arerealised realisedonly onlywhen whenstrategies strategiesare areimplemented. implemented. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 13 - DRAFT STRATEGY AND RESULTS Good strategies provide measures to monitor performance on a variety of client issues Different entry points/questions asked by clients . . . How should we respond to/take advantage of . . . We need to fix our

performance . . . The issue is . . . Can you help us . . . . . . but with common elements to the solutions All require an understanding of the clients unique position both internally, and in relation to its competition and industry. We want to be in the X business, how do we develop it . . . Make explicit assumptions about the future. Provide and assess alternate options. Understand the trade-offs of what to do and what not to do. State the financial impact of alternative options, including doing nothing. Provide milestones and measures to track performance. Detail actions to ensure the organisation fulfils its ambition. Most Mostimportantly, importantly,strategies strategiesshould shoulddeliver deliverresults. results. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 14 - DRAFT STRATEGY AND RESULTS Our approach to strategy development embraces the emotional and political issues as well as the rational ones Rational domain: Strategic position. Operational effectiveness. Capability development. Emotional domain: Development of consensus and commitment at each level and in each area. Political domain: Shifting of power within the organisation. These Theseelements elementsare areinterdependent, interdependent,however, however,the thetoolkit toolkitfocuses focuseson on rational analysis tools. rational analysis tools. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 15 - DRAFT STRATEGY AND RESULTS In an A&D, we assess the companys strategic position to identify improvement opportunities and issues to address Understand Understand Strategic StrategicPosition Position Characteristics Required for Strategic Success Robust and creative strategy that can be implemented

Strategic actions embedded in day-to-day business Organisational understanding, momentum, and enthusiasm Capability to adapt and evolve strategy as market and industry develop Review ReviewExisting Existing Strategy/Actions Strategy/Actions Understand Understandclient client mindset, mindset, assumptions assumptionsand and issues issues Define Define Key Key Strategic Strategic Issues Issues to to Address Address Operational Operationaleffectiveness effectivenessprobes probesand anddiagnostics diagnosticsidentify identifyother other improvement areas. improvement areas. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 16 - STRATEGY AND RESULTS In Results Delivery, we assess the strategic position to resolve key strategic issues DRAFT Political & Emotional Rational Define Define Strategic Strategic Issues Issues Understand Understand Strategic Strategic Position Position Develop Develop and and Evaluate Evaluate Options Options Robust and creative strategy that can be implemented Strategic actions embedded in day-to-day business Results Organisational understanding, momentum, and enthusiasm Capability to adapt and evolve strategy as market and industry develop Implementation Capability Strategy Strategydevelopment

developmentis isnot notaasimple, simple,sequential sequentialtaskit taskitis iscreative, creative, interactive, and iterative. interactive, and iterative. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 17 - Geminis Approach to Strategy Strategy and Results Understanding a Clients Strategic Position Analytics to Understand a Clients Strategic Position DRAFT UNDERSTANDING A CLIENTS STRATEGIC POSITION The key to strategy formulation is understanding a clients unique strategic position, and how that is changing over time A companys strategic position shapes on its ability to create more value than its competitors: Customer value. Economic value to reward other stakeholders (shareholders, employees, partners, etc.). The drivers of strategic position in an industry or industry segment shift over timea, but are a function of: Industry attractiveness, competitors strength. Ability to serve customer needs. Cost position. Capabilities and resources. It is vital to understand the companys unique strategic position and to choose what it will, and wont do: How do we position the client as a player among other industry players. What are the specific trade-offs it must make vis--vis its unique capabilities and position in the industry? a. See also M Porters article: What is Strategy, HBR NovemberDecember 1996. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 19 - DRAFT UNDERSTANDING A CLIENTS STRATEGIC POSITION The actions of companies influence industry scenarios and therefore their own strategic positions Industry Dynamics Framework Historical development Industry logic: Business logic Social logic Competitor map: Position and role Present Structure Future Industry Scenarios Industry evolution and future logic Business opportunities Strategic options and new KSFs Forces at play (Porter) Key Success Factors (KSFs) Industry scenario planning through international comparisons and analogies from other industries Triggers of change: Technology Regulation New industry Segments Change in input costs and availability Buyer learning, experience and uncertainty Industry growth, profitability and cyclicality New actors Dynamic Pressures and Competitive Actions Driving Forces of Change Innovations New business strategies: New business concepts Investments and divestments M&A and alliances Status quo forces or barriers to change: Understanding

Understandingthe thefuture futuredevelopment developmentof of driving forces and competitive driving forces and competitiveactions actionsis isaa major majorconsideration considerationwhen whenevaluating evaluating alternative strategic options. alternative strategic options. Lack of resources or knowledge Committed resources and investments Power structure Inertia and complacency Source: SIAR School. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 20 - UNDERSTANDING A CLIENTS STRATEGIC POSITION To understand a businesss current and emerging strategic position, we need to understand the rules of the game DRAFT Strategic Position What are the (economic) boundaries of the businesses the company is in? How are they changing? What should the company do? How can it best shape and influence the future industry? Evaluate options Decide on action How do companies create value in each of the businesses? How is this changing? How is the client company positioned relative to the competition to create value? How is it changing? The Theways waysin inwhich whichcompanies companiesoperate operateand andinterface interfaceinherently inherentlyassume assume answers to these questions. answers to these questions. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 21 - DRAFT UNDERSTANDING A CLIENTS STRATEGIC POSITION Companies can be analysed and understood based on a set of industry perspectives Key Industry Groupings Industry PerspectiveBenefits Emerging Industries Biotechnology Core Technology Industries Automotive machine tools Ball bearings Intermediary Industries Construction Mgt consulting Shipbuilding Raw Material Pulp and paper Mining Distributionoriented Retailing Brand-based Food computers Financial services Fragmented Industries Furniture textiles Services

Service Management Industries Consumer services Professional services Network Industries This is a set of ideal types of industriesprovides perspectives to highlight competitive issues and focus analysis on the most important areas: Get to the point fast. Brings understanding from earlier experience Provides a starting point for diagnosing industry logic and dynamics: Banking Telecommunication Credit cards Medra Generate strategic options Focus development of business strategy Industry Industryperspectives perspectiveshelp helpfocus focusthe theanalysis analysisand andbrings bringspast pastexperience experience to bearwe must continue to enhance this understanding. to bearwe must continue to enhance this understanding. Source: SIAR School. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 22 - DRAFT UNDERSTANDING A CLIENTS STRATEGIC POSITION There are some key issues specific to each industry which help focus analysis Industry Perspectives Industry Technology-based Technology-based Market Market Dynamics Dynamics Competitive Competitive Logic Logic Success Success Measure Measure Issues Critical Critical Assets Assets Risk and Growth Growth Mechanisms Mechanisms Key Key Factors Factors in in Coping Coping with with Risks Risks Achieving Achieving Synergies Synergies International International isation isation Project-based Project-based Brand-based Brand-based Raw Raw Material-based Material-based Service Service Business Business Network Network Industry

Industry Product Product lifecycle lifecycle Technology Technology Investment Investment waves; waves; customer customer pull, pull, technology technology push push Product Product lifecycle lifecycle Quality Quality demands demands Positioning Positioning Cyclical Cyclical Substitutes Substitutes Technology Technology Local Local business business Information Information technology technology Scale Scale economies economies Deregulation Deregulation Information Information technology technology Infrastructure Infrastructure Market Market segmentation segmentation Technology Technology Economies Economies of of scale scale Customer Customer base base Technology Technology Customer Customer loyalty loyalty Advertising Advertising Integration Integration Capacity Capacity Low Low cost cost sources/ sources/ production production Market Market segmentation segmentation Quality Quality standards standards Market Market segmentation segmentation Network Network coverage coverage Technology Technology Market Market share share New New products/ products/ models models Customer Customer base base status status Brand Brand strength strength Cost Cost efficiency efficiency Customer Customer retention

retention Customer Customer retention retention Utilisation Utilisation Technology Technology Product/ Product/ manufacturing manufacturing Brands Brands Raw Raw material material Production Production efficiency efficiency Human Human resources resources Management Management Networks Networks R&D R&D investments investments New New technologies technologies New New applications applications Exploit Exploit new new demand demand waves waves Piggy Piggy back back on on customers customers Project Project risks risks Extension Extension Revitalisation Revitalisation Overcome Overcome fragmentation fragmentation Duplication Duplication mentation mentation Network-based Network-based Changes Changes in in infrastructure infrastructure Regulation Regulation Capital Capital expenditure expenditure Marketing Marketing power power Distribution Distribution Alliances Alliances Balancing Balancing own own development development and and production production vs. vs. subsubcontracting contracting component component supplies supplies Customer

Customer base base management management Organisational Organisational flexibility flexibility Project Project management management Financial Financial management management Brand Brand management management Advertising/ Advertising/ promotion promotion Organisational Organisational innovations innovations Partnerships Partnerships Licensing Licensing Acquisition Acquisition Exploiting Exploiting cost cost gaps gaps Organic Organic Acquisitions Acquisitions Customer Customer base base Flexible Flexible organ. organ. Financial Financial strength strength Integration Integration Exploration Exploration Utilisation Utilisation of of excess excess raw raw material material Syndication Syndication Cash Cash flow flow synergies synergies Vertical Vertical integration integration Balancing Balancing upstream upstream and and downstream downstream Economies Economies of of scale scale Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm Local Local dominance dominance Strategic Strategic alliances alliances Systems Systems development development - 23 - DRAFT UNDERSTANDING A CLIENTS STRATEGIC POSITION The necessary analysis to understand the strategic position usually falls into four natural streams of activity Typical Categories of Analytical Work to Determine Business-Unit-Level Strategic Position Industry and Competitors Customer Needs

Profitability Drivers Capabilities Understanding Understandingthe thestrategic strategicposition positionis isaacreative creativeprocess processrelying relyingon on insights across all streams of analysis. insights across all streams of analysis. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 24 - DRAFT UNDERSTANDING A CLIENTS STRATEGIC POSITION To develop strategic position insights, we must consider evidence and facts from all four streams Evidence and Facts Strategic Position What are the (economic) boundaries of the businesses the company is in? How are they changing? How do companies create value in each of the businesses? How is this changing? How is the client company positioned relative to the competition to create value? How is it changing? Competition/Industry Customer Needs Profitability What are the boundaries/scope of the competition? Are there successful niche players/broad-focus players, and where do they make money? How big is the market? How fast is it growing? Are some parts growing faster than others? What are the average returns in the industry? How have they changed over time? How do they vary between players? Have there been any new entrants, and why? Are they making money? Has anyone left the industry? Why? Is the business constrained by regulation? What are the boundaries of regulation? Why do customers purchase? What is generating value? How do customers purchase? What is the trigger? What different needs-based segments exist? What is the underlying customer need? What substitute products are there? What trends are emerging? What are the pricing determinants? What are the natural boundaries of unit cost drivers (by product/ geography)? What are the boundaries of the capabilities required to compete successfully? How does the industry deliver value to its customers? Is this changing? What are the key purchase criteria by segment? Are purchase behaviours changing? How? Why? How do companies make money? How is pricing determined in each business? What are the major areas of unit cost position? What are their drivers? How is the cost structure changing? Why? What capabilities are required to deliver value? How is this changing? What and why is the overall performance of our client relative to competitors (e.g. market share, profitability)?

How does our client meet the key purchase criteria compared with the competitors? How well is our client positioned to set prices compared with its competitors? What is the cost position of our client relative to its competitors? Is it changing? How strong are our clients key capabilities, relative to its competitors? Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm Capabilities - 25 - Geminis Approach to Strategy Strategy and Results Understanding a Clients Strategic Position Analytics to Understand a clients Strategic Position ANALYTICS TO UNDERSTAND A CLIENTS STRATEGIC POSITION Analytics help us understand particular elements of the clients strategic position Key Questions to Understand Strategic Position How do companies create value in each of the businesses? How is this changing? How is the client company positioned relative to the competition to create value? How is it changing? CORE ANALYTICS Key Analytics to Understand Strategic Position SUPPLEMENTARY SUPPLEMENTARY ANALYTICS ANALYTICS What are the (economic) boundaries of the businesses the company is in? How are they changing? DRAFT Essential to understand the strategic position of our clients: Without analytics, any assessment of strategic position will be flawed Essential to evaluate clients strategic options Relevant in specific businesses or situations Break-even analysis Cluster analysis Company/competitor analysis Cost structure Customer experience Financial/ratios analysis Key purchase criteria Market-sizing and share Relative cost-positioning Segmentation Strengths and weaknesses Value chain Venkat matrix Adoption cycle Business/unit profitability Economies of scale Experience curve

Growth share matrix Key success factors PEST Porters five forces Price elasticity Product life cycle Product substitution SWOT Analytics Analyticsare aredivided dividedinto intocore coreand andsupplementary supplementaryand andare arebroken brokendown downby by stream. stream. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 27 - DRAFT ANALYTICS TO UNDERSTAND A CLIENTS STRATEGIC POSITION Competitors/Industry Stream: Questions and Analytics Strategic Position What are the (economic) boundaries of the businesses the company is in? How are they changing? How do companies create value in each of the businesses? How is this changing? Competitors/Industry Stream Strategic Questions What Whatare arethe theboundaries/scope boundaries/scopeof ofthe the competition? competition? Are Arethere theresuccessful successfulniche nicheplayers/ players/ broad-focus broad-focusplayers, players,and andwhere wheredo dothey theymake make money? money? How Howbig bigis isthe themarket? market? How Howfast fastisisititgrowing? growing? Are Aresome someparts partsgrowing growingfaster fasterthan thanothers? others? What Whatare arethe theaverage averagereturns returnsin inthe theindustry? industry? How Howhave havethey theychanged changedover overtime? time? How Howdo dothey they vary varybetween betweenplayers? players? Have Havethere therebeen beenany anynew newentrants, entrants,and andwhy? why? Are Arethey theymaking makingmoney?

money? Has Hasanyone anyoneleft leftthe theindustry? industry? Why? Why? IsIsthe thebusiness businessconstrained constrainedby byregulation? regulation? What What are arethe theboundaries boundariesof ofregulation? regulation? Main Analytics Value Valuechain chain Financial/ratios Financial/ratiosanalysis analysis Company/Competitors Company/Competitorsanalysis analysis Market-sizing Market-sizingand andshare share How Howdoes doesthe theindustry industrydeliver delivervalue valueto toits its customers? customers? Is Isthis thischanging? changing? SWOT SWOT PEST PEST Porters Portersfive fiveforces forces How is the client company positioned relative to the competition to create value? How is it changing? What Whatand andwhy whyisisthe theoverall overallperformance performanceof ofour our client clientrelative relativeto tocompetitors competitors(e.g. (e.g.market marketshare, share, profitability)? profitability)? Growth/Share Growth/Sharematrix matrix Key Keysuccess successfactors factors Core Analytic Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm Supplementary Analytic - 28 - DRAFT ANALYTICS TO UNDERSTAND A CLIENTS STRATEGIC POSITION Customer Needs Stream: Questions and Analytics Strategic Position What are the (economic) boundaries of the businesses the company is in? How are they changing? Customer Needs Stream Strategic Questions How Howand andwhy whydo docustomers customerspurchase? purchase? What

is the trigger? What is the trigger? What Whatdifferent differentneeds-based needs-basedsegments segments exist? exist? What Whatsubstitute substituteproducts productsare arethere? there? What is the underlying customer What is the underlying customerneed? need? What Whattrends trendsare areemerging? emerging? Main Analytics Segmentation Segmentation and and targeting targeting Cluster Cluster analysis analysis Customer Customer experience experience How do companies create value in each of the businesses? How is this changing? How is the client company positioned relative to the competition to create value? How is it changing? What Whatare arethe thekey keypurchase purchasecriteria criteriaby by segment? segment? Are Arepurchase purchasebehaviours behaviourschanging? changing? How? How? Why? Why? Key Key purchase purchase criteria criteria Product Product life life cycle cycle How Howdoes doesour ourclient clientmeet meetthe thekey keypurchase purchase criteria criteriacompared comparedwith withits itscompetitors? competitors? Product Product substitution substitution Adoption Adoption cycle cycle Core Analytic Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm Supplementary Analytic - 29 - DRAFT ANALYTICS TO UNDERSTAND A CLIENTS STRATEGIC POSITION Profitability Stream: Questions and Analytics Strategic Position What are the (economic) boundaries of the businesses the company is in? How are they changing? Profitability Stream

Strategic Questions Main Analytics How Howisispricing pricingdetermined? determined? What Whatare arethe thenatural naturalboundaries boundariesof ofunit unit cost costdrivers drivers(by (byproduct/geography)? product/geography)? Break-even Break-even analysis analysis Value Value chain chain Cost Cost structure structure Relative Relative cost-positioning cost-positioning How do companies create value in each of the businesses? How is this changing? How is the client company positioned relative to the competition to create value? How is it changing? How Howdo docompanies companiesmake makemoney? money? How Howisispricing pricingdetermined determinedin ineach each business? business? What Whatare arethe themajor majorareas areasof ofunit unitcost cost position? position? What Whatare aretheir theirdrivers? drivers? How Howisisthe thecost coststructure structurechanging? changing? Why? Why? How Howwell wellisisour ourclient clientpositioned positionedto toset set prices pricesversus versusthe thecompetitors? competitors? What Whatis isthe thecost costposition positionof ofour ourclient client relative to its competitors? Is relative to its competitors? Isitit changing? changing? Economies Economies of of scale scale Experience Experience curve curve Price Price elasticity elasticity Business/Unit

Business/Unit profitability profitability Core Analytic Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm Supplementary Analytic - 30 - DRAFT ANALYTICS TO UNDERSTAND A CLIENTS STRATEGIC POSITION Capabilities Stream: Questions and Analytics Strategic Position What are the (economic) boundaries of the businesses the company is in? How are they changing? Capabilities Stream Strategic Questions Main Analytics What Whatare arethe theboundaries boundariesof ofthe the capabilities capabilitiesrequired requiredto tocompete compete successfully? successfully? Strengths Strengths and and Weaknesses Weaknesses How do companies create value in each of the businesses? How is this changing? How is the client company positioned relative to the competition to create value? How is it changing? What Whatcapabilities capabilitiesare arerequired requiredto to deliver delivervalue? value? How Howisisthis this changing? changing? Venkatramen Venkatramen Matrix Matrix How Howstrong strongare areour ourclients clientskey key capabilities capabilitiesrelative relativeto toits its competitors? competitors? Core Analytic Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 31 - DRAFT ANALYTICS TO UNDERSTAND A CLIENTS STRATEGIC POSITION On projects, most of the analytics may be useful across more than one stream Summary of Stream Analytics Supplementary Core List of Analytics Break-even Break-evenanalysis analysis Cluster analysis Cluster analysis Company/competitor Company/competitoranalysis analysis Cost structure Cost structure Customer Customerexperience experience

Financial/ratios Financial/ratiosanalysis analysis Key Keypurchase purchasecriteria criteria Market-sizing Market-sizingand andshare share Relative cost-positioning Relative cost-positioning Competitors/ Competitors/ Industry Industry Customers Customers Needs Needs Profitability Profitability Capabilities Capabilities Segmentation Segmentation Strengths Strengthsand andweaknesses weaknesses Value Valuechain chain Venkatramen Venkatramenmatrix matrix Adoption Adoptioncycle cycle Business/unit Business/unitprofitability profitability Economies Economiesof ofscale scale Experience Experiencecurve curve Growth Growthshare sharematrix matrix Key Keysuccess successfactors factors PEST PEST Porters Portersfive fiveforces forces Price Priceelasticity elasticity Product Productlife lifecycle cycle

Product Productsubstitution substitution SWOT SWOT Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 32 - DRAFT ANALYTICS TO UNDERSTAND A CLIENTS STRATEGIC POSITION When starting on projects, consultants should follow some basic mental checks Process Flow: Understand Logics and Targets of Stream Set Issues to Address Choose/Use Analytics Flesh out Answers Mental Checks Whats the scope of my stream compared with other streams? Make sure no unnecessary overlaps occur Make sure the whole scope of the project is covered by at least one stream What kind of answers am I looking for? What questions must I address? What analytic can help me answer my Refer to stream-specific questions questions? Validate understanding of questions, with: Team manager JTMs Client Refer to stream-specific analytics Analytics may be shared: Avoid duplication Make sure you answer all relevant questions Make sure all answers are documented Ensure communication across all projects streams: Strategy streams (highly interdependent) NWTs The Thevalue valueis isfrom fromcombined combinedoutput outputand andinsights, insights, not from the individual stream alone.

not from the individual stream alone. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 33 - DRAFT Some useful tips when conducting analysis . . . Analysis Top Tips Ask for help Identify key Gemini contacts and experts Draw on faculty Talk to others who have performed similar analysis Facts! Facts! Facts! Derive facts Validate and cross reference Gain insight Master the information overload Set priorities Structure analysis Define hypotheses early Be open to break-through solutions but approach the client carefully Consider creative ways to do business Validate and prove hypotheses prior to communicating them Handle the client and the politics behind the scene Identify clients interest and hidden agendas Ensure early discussion of possible strategic options with client, preferably in face-to-face meetings Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 34 - About the Toolkit Structure and Contents DRAFT STRUCTURE AND CONTENTS The analytics are broken down into five main sections Toolkit Roadmap Competitors/ Industry Analytics Customer Needs Analytics Profitability Analytics Capabilities Analytics Developing and Evaluating Options Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 36 - STRUCTURE AND CONTENTS The Toolkit contains both core and supplementary analytics Core Core Analytic Analytic DRAFT Supplementary Supplementary Analytics Analytics Competitors/industry: Competitors/industry:

Value Valuechain chain Market-sizing Market-sizingand andshare share Financial/ratio analysis Financial/ratio analysis Company/competitor Company/competitoranalysis analysis Customer Customerneeds: needs: Segmentation/Needs-based Segmentation/Needs-based Cluster Clusteranalysis analysis Key purchase Key purchasecriteria criteria Customer experience Customer experience Profitability: Profitability: Cost Coststructure structure analysis analysis Break-even Break-evenanalysis analysis Relative cost-positioning Relative cost-positioning Capabilities: Capabilities: Strengths Strengthsand andweaknesses weaknessesanalysis analysis Venkat Venkatmatrix matrix Developing Developingand andevaluating evaluatingoptions: options: Segment attractiveness Segment attractiveness Financial Financialvaluation valuation Analytic Analytic Competitors/industry: Competitors/industry: SWOT SWOT PEST PEST Porters Portersfive fiveforces forces Growth Growthshare sharematrix matrix Key Keysuccess successfactors factors Customers Customersneeds: needs: Product Productlife lifecycle cycle Product Productsubstitution substitutionS-curve S-curve Adoption Adoptioncycle cycle Profitability: Profitability: Economies Economiesof ofscale scale Experience Experiencecurve curve Price Priceelasticity elasticity Business/unit Business/unitprofitability profitability Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 37 - DRAFT STRUCTURE AND CONTENTS The Toolkit follows a standard pattern for each streams section

Typical Structure of a Section Introduction Analytics (core, then supplementary): For Each Analytic Definition of analytic What it is Rationale for using the analytic Why we use it Outlines of strengths and limitations of analytic Strengths and limitations High level steps for how to use the analytic (no detailed guidance) How to apply Graphical output of analytic/electronic link Illustrative output Outline of how the analytic helps generate insights Practical tips on using the analytic Potential insights Typical sources for data required Hints and pitfalls References of good Gemini examples of the analytics use Data sources References of other analytics that supplement or complement this analytic Case examples Related analytics Compilation of stream-specific analytics: Conclusion: Link to strategy questions and answers, general caveats Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 38 - Competitors/Industry Stream Analytics Introduction Value Chain Market/Sizing and Share Financial/Ratio Analysis Company/Competitor Analysis SWOT Analysis PEST Analysis Porters Five Forces Growth Share Matrix Key Success Factors Conclusions DRAFT ANALYTICS TO UNDERSTAND A CLIENTS STRATEGIC POSITION Competitors/Industry Stream: Questions and Analytics Strategic Position What are the (economic) boundaries of the businesses the company is in? How are they changing? How do companies create value in each of the businesses? How is this changing?

Competitors/Industry Stream Strategic Questions What Whatare arethe theboundaries/scope boundaries/scopeof ofthe the competition? competition? Are Arethere theresuccessful successfulniche nicheplayers/ players/ broad-focus broad-focusplayers, players,and andwhere wheredo dothey theymake make money? money? How Howbig bigis isthe themarket? market? How Howfast fastisisititgrowing? growing? Are Aresome someparts partsgrowing growingfaster fasterthan thanothers? others? What Whatare arethe theaverage averagereturns returnsin inthe theindustry? industry? How Howhave havethey theychanged changedover overtime? time? How Howdo dothey they vary varybetween betweenplayers? players? Have Havethere therebeen beenany anynew newentrants, entrants,and andwhy? why? Are Arethey theymaking makingmoney? money? Has Hasanyone anyoneleft leftthe theindustry? industry? Why? Why? IsIsthe thebusiness businessconstrained constrainedby byregulation? regulation? What What are arethe theboundaries boundariesof ofregulation? regulation? Main Analytics Value Valuechain chain Financial/ratios Financial/ratiosanalysis analysis Company/Competitors Company/Competitorsanalysis analysis Market-sizing Market-sizingand andshare share How Howdoes doesthe theindustry industrydeliver delivervalue

valueto toits its customers? customers? Is Isthis thischanging? changing? SWOT SWOT PEST PEST Porters Portersfive fiveforces forces How is the client company positioned relative to the competition to create value? How is it changing? What Whatand andwhy whyisisthe theoverall overallperformance performanceof ofour our client clientrelative relativeto tocompetitors competitors(e.g. (e.g.market marketshare, share, profitability)? profitability)? Growth/Share Growth/Sharematrix matrix Key Keysuccess successfactors factors Core Analytic Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm Supplementary Analytic - 40 - Competitors/Industry Stream Analytics Introduction Value Chain Market/Sizing and Share Financial/Ratio Analysis Company/Competitor Analysis SWOT Analysis PEST Analysis Porters Five Forces Growth Share Matrix Key Success Factors Conclusions COMPETITORS/INDUSTRY STREAMINTRODUCTION We have provided tools for understanding our clients business scope and overall attractiveness Why? Why? DRAFT How? How? Establish Establish the thescope scope of ofour ouranalysis, analysis,and andfocus

focus our our effort: effort: Define Definethe theboundaries boundariesof ofthe thebusiness businessand andrelevant relevantsegments segmentsinin which whichour ourclient clientcompetes: competes: AAfundamental fundamentalstep, step,usually usuallythe thefirst firstininmost moststrategy strategy engagements engagements Often Oftenclients clientsperceive perceivethemselves themselvesto tobe becompeting competingininthe the business, not the segments, thus: business, not the segments, thus: They Theymiss missopportunities, opportunities,or or They vulnerable to competitors Theyare are vulnerable to competitors Help Helpreshape reshape clients clients perceptions perceptions of ofwhere where they theyare are competing: competing: Particularly Particularlyuseful usefulininan anindustry industryininwhich whichthe thecompetitive competitive boundaries have shifted boundaries have shifted In Insome someinstances, instances,defining definingthe the business business and and segments can be done very quickly segments can be done very quickly In Inother othercases, cases, ititis isaa highly highly iterative iterativeprocess process requiring input from other analytics, requiring input from other analytics, and and applying applying our our judgement judgementto to this this At Ataa high-level, high-level, we we can can usually usually define defineaa clients

clients business quickly by: business quickly by: Questioning Questioningour ourclient. client. Examining broker Examining brokerreports, reports,annual annualreports, reports,industry industryreports, reports,and and textlines. textlines. However, However, to to gain gainaa deeper deeperunderstanding, understanding,and and generate generate meaningful meaningful insights, insights,we we typically typically need needto: to: Potentially, Potentially,uncover uncoveropportunities opportunities in in under-served under-served segments, or areas in which our client segments, or areas in which our clientis is vulnerable vulnerable to competitors to competitors Construct Constructaavalue valuechain chainfor forthe theindustry, industry,and andfor forour ourclients. clients. Determine size of the business, and segments, and Determinethe the size of the business, and segments, andhow howthese these have havechanged, changed,and andare areexpected expectedto tochange. change. Determine Determinethe themarket marketshare shareof ofcompetitors competitorsininthe thebusiness businessand and sub-segments, sub-segments,and andhow howand andwhy whythese theseare arechanging. changing. Review Reviewthe therelative relativeand andabsolute absoluteperformance performanceof ofour ourclient clientand and key competitors (including their financial

performance). key competitors (including their financial performance). We We describe describe each eachof ofthese these four fourprocesses processes later later Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 42 - Competitors/Industry Stream Analytics Introduction Value Chain Market/Sizing and Share Financial/Ratio Analysis Company/Competitor Analysis SWOT Analysis PEST Analysis Porters Five Forces Growth Share Matrix Key Success Factors Conclusions DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Value chainintroduction Why Why We We Use Use ItIt What What ItIt Is Is AAdescription descriptionof ofthe thekey keyactivities activitiesperformed performedeither either across an industry or across a company: across an industry or across a company: Usually Usuallyshown shownas asaalinear linearflow flowof ofactivities. activities. A Acompany companyvalue valuechain, chain,also alsoshows showsthe thesupport support activities performed, e.g. systems support. activities performed, e.g. systems support. Michael Porter Michael Portercodified codifiedthe thevalue valuechain chainconcept conceptin

in a 1985. 1985.a AAvalue valuechain chainshould shouldshow showwhere wherevalue valueis isbeing being created within an industry or company: created within an industry or company: Should Shouldbe bequantitative, quantitative,not notqualitative. qualitative. Should Shouldshow showthe thevalue valueof ofcosts costsand andrevenues revenuesat at each stage in the value chain. each stage in the value chain. Primary Primaryobjective objectiveis isto todetermine determinewhere whereand andhow howvalue valueis is created in an industry or company created in an industry or company Value Valuechains chainsare arealso alsoused usedto: to: Understand Understandthe thekey keyactivities activitieswithin withinan anindustry industryor orcompany. company. Determine there Determinewhether whether thereisisany anybackward backwardor orforward forwardintegration integration b in inan anindustry. industry.b Map Mapkey keyplayers playersat ateach eachstage stageof ofan anindustrys industrysvalue valuechain. chain. Strengths Strengths & & Limitations Limitations Strengths: Strengths: Clarifies Clarifieskey keystages stagesin inan anindustry industryor orcompany, company,showing showingwhere where

value is created, and can demonstrate key shifts value is created, and can demonstrate key shiftsalong alongthe thevalue value chain. chain. Limitations: Limitations: Users Usersdo donot notapply applythe theanalytic analyticfully, fully,i.e. i.e.they theystop stopat atdescribing describing key keyactivities, activities,and anddo donot notdetermine determinewhere wherevalue valueisiscreated. created. a. In his book Competitive Advantage, Free Press. b. Forward = purchasing supplier, backward = purchasing customer. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 44 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Value chainhow to apply it There are three steps in developing a value chain: Identify individual value activities: The appropriate degree of disaggregation depends on the economics of the activities and the purposes for which the value chain is being analysed. Distinguish between primary and support activities. Assign the value activities to the categories (or functions) that best represent their contribution to a firms competitive advantage. Order the activities, broadly following the process flow: Determine the links between activities. Once the activities are detailed in the value chain, map costs, returns and players across the value chain where applicable. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 45 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Value chainillustrative output Distribution of Operations Costs in Flow Control Values Generic Manufacturing Company Value Chain Primary Activity Primary Activities 67% Links with suppliers Operations/ Manufacturing Logistics Marketing and Sales After-sales Support Support Activities Human Resources Margin 1% Margins Support Activities Infrastructure R&D 9% Procurement 1% 8%

2% Procurement HR Infrastructure Management Source: M. E. Porter, Competitive Advantage, Free Press, 1985. 9% 6% 1% R&D Inbound Operationsa Outbound Marketing Logistics Logistics and Sales 1% Service Source: Adapted from M. E. Porter, Competitive Advantage, Free Press 1985. a. 27% = HR costs; 40% = Purchased operating inputs. Competitors Competitorscan canalso alsobe bemapped mappedalong alongthe thevalue valuechain. chain. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 46 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Value chaintop tips Analytic Analytic helps helpsdetermine: determine: Potential Potential Insights Insights Key Keyshifts shiftswithin withinan anindustry industry(backwards (backwardsor orforwards forwardsalong alongthe thevalue valuechain) chain) Why competitors may be targeting specific sections of the value chain Why competitors may be targeting specific sections of the value chain Whether Whetherthe theindustry industryvalue valuechain chainisischanging changing Do: Do: Quantify Quantifythe the cost costat ateach each stage stage in in an an industry industry or orcompany company value value chain chain Hints Hints and and Pitfalls Pitfalls Understand Understandthe the dynamics dynamicsof ofaavalue valuechainwhats chainwhats changed? changed?why? why? Read Read Porters Porters book book on

on the the roles roles of of the the value value chain chain analytic analytic in in assessing competitive position: assessing competitive position: This Thisisisnot notnecessarily necessarilyaaGemini Geminipoint pointof ofview, view,but butprovides providesuseful usefulbackground backgroundcontext context Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 47 - COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Value Chaindata sources, case examples and related analytics Data Data Sources Sources DRAFT Gemini Gemini project projectwork work(providing (providing value value chain chainoutput output from fromprevious previous projects) projects) Questioning clients and/or industry experts Questioning clients and/or industry experts Piecing Piecingtogether together the theactivities activities via viasecondary secondary data datasources: sources: Annual Annualreports reports Broker Brokerreports reports Industry Industryreports reports Database Databasesearches searches Internal Internal cost costdata data (client (clientmanagement managementaccounts) accounts) Case Case Examples Examples The The following followingdocuments documentscontain containgood goodexamples examples of ofvalue valuechain chainanalysis analysisand and output: output: Related Related Analytics Analytics Developing Developingan anindustry industryand andcompany companyvalue valuechain

chainis istypically typicallyaacritical criticalstep stepin indefining definingaa clients clientsbusiness business (see (see introduction introduction of ofthis this section): section): Crossing Crossingthe theRubicon: Rubicon: The TheBusiness BusinessImplications Implicationsof ofthe theEuro, Euro,EuroCoE, EuroCoE,Gemini GeminiCompass Compass Various from BUPA project, on London Server archives Variousdocuments documents from BUPA project, on London Server archives One Oneofofseveral severalof ofanalytical analyticalsteps stepsinindefining definingaabusiness business Used Usedto tomap mapout outaa customers customersexperience experience of ofour ourclient clientcompany: company: See SeeCustomer CustomerExperience Experience HBR HBRMay/June May/June1998Profit 1998ProfitPoolsa Poolsafresh freshlook look at atstrategy strategy Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 48 - Competitors/Industry Stream Analytics Introduction Value Chain Market/Sizing and Share Financial/Ratio Analysis Company/Competitor Analysis SWOT Analysis PEST Analysis Porters Five Forces Growth Share Matrix Key Success Factors Conclusions

DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Market-sizing and shareintroduction Why Why We We Use Use ItIt What What ItIt Is Is Quantifying Quantifyingthe thesize sizeand andgrowth growthof ofaamarket marketor orsegments segments either eitherby: by: Value Value(of (ofrevenue revenueor orprofitability profitabilityover overaaspecified specifiedperiod). period). Volume (of units produced over a specified Volume (of units produced over a specifiedperiod). period). As Aswith withmany manystrategy strategyanalyses, analyses,ititis isimportant importantto toshow show the thedynamic, dynamic,i.e. i.e.quantify quantifythe thesize sizeof ofaabusiness businessor or segment segmentover overtime: time: Historically Historically(over (overaanumber numberofofyears). years). Forecasting Forecasting(projecting (projectingout outover overfuture futureyears). years). In Insome somecases, cases,market marketsize sizemay maybe beavailable availablefrom from secondary secondarydata datasourcesotherwise sourcesotherwisewe wemust mustestimate estimateit. it. Measure of how much of a business market or segment Measure of how much of a business market or segment individual individualcompetitors competitorsaccount accountfor. for. Market Marketshare sharecan canbe bemeasured measuredby: by: Value (i.e.

proportion of total revenue Value (i.e. proportion of total revenueor orprofit). profit). Volume (i.e. proportion of total units produced). Volume (i.e. proportion of total units produced). Typically, Typically,we welook lookat atboth bothabsolute absolutemarket marketshare, share,and and relative market share (i.e. share compared with relative market share (i.e. share compared withother other competitors). competitors). There Thereare areseveral severalmarket marketshare sharemeasures: measures: Absolute Absoluteand andrelative relativeshare shareof oftotal totalbusiness businessmarket. market. Absolute relative share of total business segment. Absoluteand and relative share of total business segment. Absolute Absoluteand andrelative relativeshare shareof oftotal totaladdressable addressablemarket market (i.e. (i.e.segments segmentsininwhich whichour ourclient clientcompetes). competes). Strengths: Strengths: Provides Providesaaquantitative quantitativemeasure measureof ofbusiness businessof ofsegment segment attractiveness. attractiveness. Provides Providesthe thekey keybenchmark benchmarkagainst againstwhich whichwe wemeasure measuremarket market share, share,and anddetermine determinerelative relativeperformance performanceofofcompetitors. competitors. Essential Essentialtotounderstanding understandingcompetitors competitorsrelative relativesize, size,importance, importance, and andperformance. performance. Limitations: Limitations: Sizing Sizingaamarket

marketfrom fromscratch scratchcan cantake takeweeks weeksor ormonths. months. Not Notthe theonly onlydeterminant determinantof ofattractiveness attractivenessc.f. c.f.potential potentialtotomake make money. money. Help Helpdetermine determineabsolute absoluteand andrelative relativeshare shareof ofcompetitors competitorsin inaabusiness business or orsegment: segment: Essential Essentialtotounderstand understandwhich whichcompetitors competitorsare aresuccessful successfulor or unsuccessful. unsuccessful. Helps determine the attractiveness of a business or segment: Helps determine the attractiveness of a business or segment: Its Itssize. size. Whether Whetherititisisgrowing, growing,flat, flat,or orshrinking. shrinking. Relative Relativeattractiveness attractivenesscompared comparedwith withother otherbusinesses businessesor orsegments. segments. Determine the power of competitors Determine the power of competitorscompared comparedwith witheach eachother, other, customers, customers,and andsuppliers. suppliers. To Todetermine determinethe therelative relativeperformance performanceand andposition positionof ofcompetitors, competitors,and and how howthis thisisischanging changingover overtime: time: Whos successful/unsuccessful? Why? Whos successful/unsuccessful? Why? Are Arenew newentrants entrantsgaining gainingshare? share? Are Aresubstitutes substitutesbeing

beingused? used? In Inconjunction conjunctionwith withother otheranalytics, analytics,establishes establisheswhether whethershare sharebuilds builds other otheradvantages, advantages,e.g. e.g.lower lowerunit unitcosts, costs,RMS RMSvs. vs.ROCE. ROCE. Strengths Strengths & & Limitations Limitations Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 50 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Market sizing and sharehow to apply it Market Sizing Sizing Sizing Based Based on on Publicly Publicly Available Available Data Data Constructing Constructing Own Own Estimate Estimate of of Market Market Size Size Understand Understandhow howsources sourcessize sizethe themarket market(i.e. (i.e.methodology). methodology). Evaluate Evaluatereliability reliabilityof ofsource sourcedata. data. Try Tryto toobtain obtain23 23independent independentestimates estimatesof ofmarket marketor or segment size, and cross-check estimates. segment size, and cross-check estimates. Understand Understandtrends trendsin inmarket marketsize sizeand andunderlying underlyingroot root causes. causes. Validate Validatetotal totalsize sizeand andtrends trendswith withclient clientand/or and/orindustry industry experts. experts. Identify Identifykey keydrivers driversof ofmarket marketsize, size,e.g.: e.g.: Number Numberofofcustomers customersinintotal totalbusiness businessor

orsegment. segment. Number of units of goods or services (e.g. Number of units of goods or services (e.g.number numberofofflights, flights,number numberof ofcars cars produced). produced). Average Averagenumber numberofofunits unitspurchased purchasedper percustomer. customer. Identify Identifykey keydrivers driversof offuture futuremarket marketsize, size,e.g.: e.g.: Relevant Relevantmacroeconomic macroeconomictrends. trends. Changes Changesinfluencing influencingcustomer customerdemand. demand. Changes Changesininnumber numberof ofcustomers, customers,or oraverage averagepurchases purchasesper percustomer. customer. Develop Developmethodology methodologyto tosize sizethe themarketthere marketthereare aretwo twobroad broad approaches: approaches: Top-down, Top-down,i.e. i.e.from frommacro-variables macro-variables(e.g. (e.g.total totalsize sizeof ofrelated relatedbusinesses). businesses). Bottom-up, i.e. from micro-variables (e.g. number of customers). Bottom-up, i.e. from micro-variables (e.g. number of customers). Often Oftenwe weuse useboth bothaatop-down top-downand andbottom-up bottom-upapproach approachto tocheck checkresults. results. Develop picture of how things have changed over time: Develop picture of how things have changed over time: What Whatisisthe the55year yeargrowth growthrate? rate? Calculate Compound Calculate CompoundAnnual AnnualGrowth GrowthRate Rate(CAGR). (CAGR). 1 Current size /n n = number of years growth

CAGR = Starting size Split Splitout outreal realand andnominal nominalgrowth growthfor forvalue valuebasis, basis,i.e. i.e.adjust adjustfor forinflation. inflation. The time available and degree of accuracy required will determine The time available and degree of accuracy required will determinechoice choice of ofmethodology. methodology. Once Onceyou youhave havedeveloped developedyour yourmethodology, methodology,the thekey keystages stagesare: are: Developing Developingand anddocumenting documentingassumptions. assumptions. Gathering data. Gathering data. Building Buildingmarket marketsize sizeestimates. estimates. Validating and refining Validating and refiningmarket marketsize sizeestimates. estimates. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 51 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Market sizing and sharehow to apply It Calculating Market Share Steps Steps before beforeDetermining Determining Market MarketShare Share Determine Determinethe thebusiness businessmarket(s) market(s)or orsegments segments to tobe besized sized Size Sizethe thebusiness businessmarket(s) market(s)or orsegment(s): segment(s): Identify Identifythe thecompany's company'sor orindividual individual competitors competitorssales, sales,profits profitsor orunits unitsof ofoutput output See

See Market-sizing Market-sizing Various Various Market Market Share Share Measures Measures Exist Exist Measure Measure of ofShare Share How Howto toDo Do Absolute Absolute Market Market ShareBusiness ShareBusiness Total TotalCompany CompanySales Sales Total TotalMarket MarketSales Sales Absolute Absolute Market Market ShareSegment ShareSegment Company CompanySegment Segment Sales Sales Market MarketSegment SegmentSales Sales Relative Relative Market Market a ShareBusiness ShareBusinessa Total TotalCompany CompanySales Sales Total TotalSales Salesof of Largest Largest Competitor Competitor Relative Relative Market Market a ShareSegment ShareSegmenta Company CompanySegment Segment Sales Sales Biggest BiggestCompetitors CompetitorsSegment SegmentSales Sales a. If company is the largest, compare to other players. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 52 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Market-sizing and shareillustrative output Market Sizing Evolution of sales by Business Segment 5000 100% 4500 Evolution of % of Total Sales by Business Segment 90% 4000 80% 3500 3000 Business CAGR 70% Other 9%

60% 11 % 50% 301 % 40% 2500 Medipsy 2000 GSMS 1500 Dynamis 23 % 1000 Acute care 25 % Overall 24 % 500 0 30% 20% 10% 0% 1993 1994 1995 1996 1993 Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm 1994 1995 1996 - 53 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Market-sizing and sharetop tips Potential Potential Insights Insights Analytic Analytichelps helpsdetermine: determine: Hints Hints & & Pitfalls Pitfalls Do: Do: Sanity Sanitycheck checkfirst first(comparisons (comparisonswith withGDP, GDP,demographic demographicdata, data,other othercountries). countries). Cross-check all data (both publicly available market size data and Cross-check all data (both publicly available market size data andown ownestimates). estimates). Test/validate Test/validatewith withclient clientmarket marketsize sizeassumptions assumptionsand andoutput. output. Gather Gatherpast, past,present,

present,and andfuture futuremarket marketsize sizeestimates. estimates. Probe for the root causes of changes in total Probe for the root causes of changes in totalmarket marketsize. size. Ensure Ensureconsistency consistencybetween betweenmethodology methodologyfor formeasuring measuringtotal totalmarket marketsize sizeand andmeasuring measuringindividual individual companies companiesperformance. performance. Look Lookat atrelative relativeshare share(i.e. (i.e.not notsolely solelyabsolute absoluteshare). share). Dont Dont Only Onlyuse usethis thisdata datato todetermine determineattractiveness attractiveness Just use to size revenue (can size Just use to size revenue (can sizeby byother otherunits, units,e.g. e.g.units unitsat atoutput). output). Over analyseinsight often comes from other analysis. Over analyseinsight often comes from other analysis. Assume Assumeaaclients clientscalculation calculationis iscorrect: correct: Industry Industryattractiveness attractiveness(past, (past,present, present,future). future). Relative Relativesuccess successof ofcompetitors competitors(when (whenused usedto todetermine determineabsolute absoluteand andrelative relativemarket marketshare). share). Competitive pressure (from growth rates and consolidation). Competitive pressure (from growth rates and consolidation). Degree Degreeofofmarket marketconcentration/fragmentation. concentration/fragmentation. Relative Relativeperformance performanceof ofcompetitors, competitors,and andhow howthis thisisischanging.

changing. Critical Criticalissues issuesto toprobe probefurther further(e.g. (e.g.why whycompetitor competitorXXisisgaining gainingshare; share;cost costadvantages advantagesofofholding holdingdominant dominantshare). share). Hypotheses regarding market share and profitability of competitors. Hypotheses regarding market share and profitability of competitors. Always Alwayscheck checkindustry industryassumptions. assumptions. Forget Forgetto tolook lookat athistorical historicaldevelopments. developments. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 54 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Market-sizing and sharedata sources, case examples and related analytics Data Data Sources Sources Publicly Publiclyavailable available data: data: Clients Clientsdata data(business (businessplans, plans,and andinternal internalreports) reports) Annual Annualreports reports(for (forclient clientand andcompetitors) competitors) Broker Brokerreports reports(from (frominvestment investmentbanks) banks) Industry Industryreports reports Database Databasesources sources Industry Industryassociations associations Covered Coveredin in relevant relevant sections sectionson onrelated related analytics: analytics: No Noadditional additionaldata datarequired requiredtotodetermine determinemarket marketshare. share. Case Case Examples Examples The The following following documents documents contain contain good good examples examples of ofmarket-sizing market-sizinganalysis

analysisand andoutput: output: Related Related Analytics Analytics Global GlobalTransaction TransactionServices Services(Market (MarketSizing SizingMethodology): Methodology): FS FSKbase, Kbase,Gemini GeminiCompass Compass Market-sizing Market-sizingis is aa critical critical step step within within Business Business Definition Definition (see (seeintroduction introduction of ofthis thissection) section) Company/competitor Company/competitoranalysis analysis Financial analysis/ratios Financial analysis/ratiosanalysis analysis Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 55 - Competitors/Industry Stream Analytics Introduction Value Chain Market/Sizing and Share Financial/Ratio Analysis Company/Competitor Analysis SWOT Analysis PEST Analysis Porters Five Forces Growth Share Matrix Key Success Factors Conclusions DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Financial analysisIntroduction Financial analysis consists of analysing the financial performance of a company, over time and relative to its peers: In particular to understand whether and how companies create value. Used to assess where a companys problems might lie. Can be done internally for own company, or externally for competitors. Ratios are especially useful in comparisons with competitors. Building on three different kind of financial statements, financial analysis allows either trends, ratios or cost structure analyses. Inputs to Financial Analysisa Dimensions of Financial Analysisa Ratio/Trends Analysis Assess evolution of: The Balance Sheet Revenues, profits, and costs. Capital base (debt, equity). Asset base (tangible, intangible). Cashflow. The Profit and Loss (P&L)

Account Assesses/measures specific financial features of a firm. The Cash Flow statement Cost Structure Analysis Breaks down cost structure into constituents (see cost structure analytic) a. See detail in following pages. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 57 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Financial analysisintroduction (cont.) All of the statements are linked together and relate back to the ongoing activities of the firm. Balance Sheet ONGOING STREAM OF EVENTS Profit and Loss P&LMatches costs to associated revenues in a given year to give a representative picture of profitability. Hence, assets are Depreciated over time and charged to P&L gradually as the asset is used up over its useful life to enable the revenues to be created. Opening Opening BALANCE BALANCE SHEET SHEET Assets Assets Fixed Fixed Assets Assets Working Working capital capital Financing Financing Owners Owners interests interests Outside Outside liabilities liabilities Summarises the value of what a company owns less what it owes, and balances them with the sources of financing (debt and shareholders funds). Stated at a specified point in time (not for a period) Transactions Transactions in in year year Cash Cash received received and and paid paid credit credit given given and and received received Trading Trading Revenues Revenues Recorded Recorded in in Year Year Expenditure Expenditure Recorded Recorded in in Year Year Other Other Capital Capital Paid Paid In In Borrowing Borrowing Assets Assets Purchased Purchased Closing Closing BALANCE BALANCE SHEET SHEET PROFIT PROFIT AND AND LOSS LOSS ACCOUNT ACCOUNT Revenues relevant to year Income =

Expenditure relevant to year Expenses = Assets Assets Fixed Fixed Assets Assets Working Working capital capital Financing Financing Owners Owners interests interests Outside Outside liabilities liabilities Profit (loss) CASHFLOW CASHFLOW STATEMENT STATEMENT Operating Operating activities activities Investing Investing activities activities Servicing Servicing of of financing financing Taxation Taxation Financing Financing Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm Cashflow Shows the real cash flows associated with income and expenses in a given year, to show the actual change in cash position. Costs and revenues are not matched. - 58 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Financial analysisintroduction Definition of Common Financial Terms Accounts AccountsPayable Payable Accounts AccountsReceivable Receivable (or (orTrade TradeCredit) Credit) Money Moneyowed owedto tosuppliers suppliers Money Moneyowed owedby bycustomers customers Assets Assets Things Thingsowned owned Book BookValue Value The Thevalue valueat atwhich whichan anitem itemis isreported reportedin infinancial financialstatements statements(cf. (cf.market marketvalue) value) Capital Capital The Theamount amountinvested investedin inaaventure venture Capitalisation Capitalisation

Sum Sum of ofall alllong-term long-termsources sourcesof offinancing financingto tothe thefirm firm(equals (equalstotal totalassets assetsless lesscurrent currentliabilities) liabilities) Cashflow Cashflow The Theamount amountof ofcash cashgenerated generatedor orconsumed consumedby byan anactivity activityover overaacertain certainperiod periodof oftime time Common CommonShares Shares (or (orCommon CommonStock) Stock) Securities Securitiesrepresenting representingan anownership ownershipin inaafirm firm Cost Costof ofGoods GoodsSold Sold Cost Costof ofsales sales Total of all Total of allcosts costsrequired requiredto toacquire acquireand andprepare preparegoods goodsfor forsale sale Cost Costof ofDebt Debt Yield Yieldto tomaturity maturityon ondebt debt(i.e. (i.e.internal internalrate rateof ofreturn returnto tomaturity)frequently maturity)frequentlyafter aftertax, tax,in inwhich whichevent eventititisis11minus minus the tax rate times the yield to maturity the tax rate times the yield to maturity Debt Debt(Liability) (Liability) An Anobligation obligationto topay paycash cashor orto

toprovide provideother othergoods goodsor orservices servicesto toanother anotherparty party Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 59 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Financial analysisintroduction (cont.) Definition of Common Financial Terms Depreciation Depreciation Reduction Reductionin inthe thevalue valueof ofaalong-lived long-livedasset assetfrom fromuse useor orobsolescence. obsolescence. The Thedecline declineisisrecognised recognisedin inaccounting accounting by byaaperiodic periodicallocation allocationof ofthe theoriginal originalcost costof ofthe theasset assetto tocurrent currentoperations operations Dilution Dilution The Thededuction deductionin inany anyper pershare shareitem item(such (suchas asearnings earningsper pershare shareor orbook bookvalue valueper pershare) share)due dueto toan anincrease increasein in the number of shares outstanding either through new issue or conversion of outstanding securities the number of shares outstanding either through new issue or conversion of outstanding securities Earnings Earnings (or (orIncome; Income;Net NetIncome, Income,Net NetProfit; Profit; Profit) Profit) Equity Equity The Theexcess excessof ofrevenues revenuesover overall allrelated relatedexpenses expensesfor foraagiven

givenperiod period (or (orOwners Ownersequity, equity,shareholders shareholders equity, equity,net networth) worth) The Theownership ownershipinterest interestof ofcommon commonand andpreferred preferredstockholders stockholdersin inaacompany company(on (onaabalance balancesheet, sheet,equity equityequals equals total totalassets assetsless lessall allliabilities) liabilities) Fixed FixedCost Cost Any Anycost costthat thatdoes doesnot notvary varyover overthe theobservation observationperiod periodwith withchanges changesin involume volume(as (asopposed opposedto tovariable variablecosts) costs) Insolvency Insolvency The Thecondition conditionof ofhaving havingdebts debtsgreater greaterthan thanthe therealistic realisticvalue valueof ofones onesassets assets(as (asopposed opposedto tosolvency) solvency) Liquid LiquidAsset Asset Any Anyasset assetthat thatcan canbe bequickly quicklyconverted convertedto tocash cashwithout withoutsignificant significantloss lossof ofvalue value Liquidity Liquidity Extent Extentto towhich whichaacompany companyhas hasassets assetsthat thatare arereadily readilyavailable availableto tomeet meetobligations obligations Market MarketValue Value

Price Priceat atwhich whichan anitem itemcan canbe besold sold(cf. (cf.book bookvalue) value) Operating OperatingExpenses Expenses Costs Costsincurred incurredto toproduce producegoods goodsor orservices services Revenues Revenues Sales Sales Trading TradingProfit Profit (or (orEBIT) EBIT) Earning Earningbefore beforeinterest interestand andtax tax(see (seemethod methodof ofcalculation calculationin infollowing followingpages) pages) Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 60 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Financial analysisintroduction (cont.) P&L Account The P&L account provides a representative picture of profitability in a given year Turnover - Cost of Goods Sold Gross Profits (Salescould be minus discounts) (Direct costs) - Overheads PBIT (Administration - indirect costs and depreciation) (Trading profit = operating profit) - Interest PBT - Tax PAT Costs such as assets are matched and are depreciated over time and charged to the P&L gradually as the asset is used up (Interest charges for financing) (Profit Before Tax) (Corporate tax) (Profit After Tax) Dividend Retained for Reserves (Appropriation of profits transferred to balance sheet in retained profit) Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 61 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Financial analysisintroduction (cont.) The Balance Sheet The balance sheet shows a companys financial position at a specific date The balance sheet features two basic areas of the companys financials: 1. Assets 2. Liabilities/Funds

Fixed Assets Owners Funds All long-term assets: Intangibles (Goodwill, patents, etc.) Net fixed assets (land, building, equipment, etc.) Long-term investments (share in associated companies) Issued common stock Capital reserves: Surpluses from sources other than normal trading and that belong to ordinary shareholders Revenues reserves: Surpluses generated by trading Long-term Liabilities Current Assets All long-term loans (more than 1 year) All short-term assets: Inventories (stocks, work in progress, raw materials, etc.) Cash Accounts receivable (due from trade debtors) Miscellaneous (all other short-term assets) Current Liabilities All short-term liabilities (to be paid within 1 year): Account payable (due to trade creditorssuppliers) Short-term loans (bank overdraft and all other interest-bearing short-term debts) Miscellaneous (all other short-term liabilities) What the business owns Uses for where the money is spent Amounts owed by the business Sources from which the money is obtained Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 62 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Financial analysisintroduction (cont.) Cash Flow Statement Cash flow statement tells how a companys cash position has changed during the year Operating activities: All items that relate to the companys operations. Investing activities: All buying and selling of fixed assets that relate to the companys operations. Servicing of finance: Interest paid on loans and dividends paid to shareholders. The key difference between the P&L and cash flow is that the cashflow shows real sources of income and expenditures, whereas the P&L only shows a representative picture, by for example, including only an allocation of asset expense. Taxation Financing: All transactions relating to the raising of funds. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 63 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Financial ratio analysisintroduction Why Why We We Use Use ItIt What What ItIt Is Is Ratios Ratiosare aremeasures measuresof ofaafirms firmsspecific specific financial features financial features Financial Financialratios ratiostypically typicallyfall fallinto intofour four categories: categories:

Key strategic ratios 1 Profitability/ Profitability/ Efficiency Efficiency Ratios Ratios 2 3 Liquidity Liquidity Ratios Ratios Solvency Solvency Ratios Ratios 4 Return on sales: Profit margin Gross margin Return on net assets Return on equity Current ratio Quick ratio Working capital Debt equity ratio Price-earning ratio Earning per share Investment Investment Ratios Ratios Other ratiosa Inventory turnover Days inventory Total asset turnover Days receivable Fixed asset utilisation Interest cover Dividend yield Earning yield Dividend cover Dividend per share Financial Financialratios ratioshelp helpus usdiagnose diagnosethe thefinancial financialhealth healthof ofaafirm: firm: Profitability/efficiency Profitability/efficiencyratios ratiosmeasure measurehow howwell wellaafirm firmuses usesits its assets to generate profits assets to generate profits Liquidity Liquidityratios ratiosmeasure measureaafirms firmsability abilityto tomeet meetshort-term short-termliabilities liabilities Solvency ratios are an indicator of a firms financial Solvency ratios are an indicator of a firms financialstrength strength(assess (assess the themix mixofoffunds fundsininthe thebalance

balancesheet sheetand andmeasure measurefirms firmsability abilityto to withstand withstandoperating operatingsetbacks) setbacks) Investment Investmentratios ratiosare areindicative indicativeof ofthe themarkets marketsperceptions perceptionsof ofaa company. company. They Theyare areused usedmainly mainlyby byinvestors investorsto tovalue valueaacompany. company. Strengths Strengths & & Limitations Limitations Strengths: Strengths: Can Canbe beused usedtotoidentify identifypotential potentialareas areasofofimprovement improvement Limitations: Limitations: Accounting Accountingprinciples principlescan candiffer differmaking makingcomparisons comparisonsdifficult difficult Need to be wary of management managing Need to be wary of management managingyear-end year-endfigures figures Book Bookvalues valuesfor forfixed fixedassets assetsmay maybe beout outof ofdate date a. To be used selectively, according to the industry and/or the level of detail required. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 64 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Financial ratio analysishow to do it Key Strategic Ratios (1/5) Profitability/Efficiency Ratios Return on sales (ROS): Are goods sold at an appropriate price and produced efficiently? Two ratios reflect ROS: Ratio Ratio Profit ProfitMargin Margin (also known (also knownas as operating operatingmargin) margin) Gross GrossMargin Margin Formula Formula What WhatItItDoes Does == PBIT

PBIT Sales Sales Where: Where: PBIT: PBIT:profit profitbefore beforeinterest interestand and tax tax == Sales Salescost costof ofgoods goodssold sold operating operatingexpenses expenses == Trading Tradingprofit profit == Gross Grossprofit profit Sales Sales Where: Where: Gross Grossprofit profit == Sales Sales cost costof ofgoods goodssold sold Drivers Drivers Measures Measuresbottom bottomline linecompany company profitability profitability Indicates Indicatesthe theeffectiveness effectivenessof ofsales salesand and production productionin inproducing producingprofit profit Constitutes Constitutesaagood goodratio ratiofor forcomparing comparing the theperformances performancesof ofcompetitors competitorsin inthe the same industry same industry Sales: Sales: Measures Measurespercentage percentageof ofrevenue revenue remaining remainingafter afterthe thecost costof ofgoods goodssold sold is covered is covered Constitutes aaweak Constitutes weakratiolooks ratiolooksat at a variable acosts only variable costs only Price Price Cost Costof ofproducing producinggoods goods Price Price Volume Volume

Operating Operatingexpenses expenses a. Costs that are altered by a change in output. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 65 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Financial ratio analysishow to do it Key Strategic Ratios (2/5) Profitability/Efficiency Ratios (cont.) Return on Net Assets (RONA): How profitable is this company? Ratio Ratio RONA RONAisisalso alsoknown knownas: as: Return Returnon onAsset Asset(ROA) (ROA) Return on Capital Return on Capital Employed Employed(ROCE) (ROCE) Formula Formula What WhatItItDoes Does a == (Profit (ProfitBefore BeforeInterest Interest++Tax) Tax)a Fixed FixedAssets Assets++(Current (Current b Assets AssetsCurrent CurrentLiabilities) Liabilities)b (Profit (ProfitMargin MarginxxAsset AssetTurnover) Turnover) Measures Measuresprofitability profitability Measures Measureshow howwell wellassets assetshave havebeen been employed, irrespective of how employed, irrespective of howthe thecompany company is isfinanced financed Profit Profitmargin: margin: Price Price Cost Cost Asset Assetturnover: turnover: Sales Sales Capital Capitalemployed employed a.a. Can Canbe bedefined definedas asprofit profitafter aftertax, tax,but butbefore before deduction deductionofofinterest. interest. b.b. Current Currentassets

assetscurrent currentliabilities liabilities==working working capital. capital. ItItrepresents the amount of day-to-day represents the amount of day-to-day operating operatingliquidity liquidityavailable availabletotobusiness. business. Drivers Drivers Return on Equity (ROE): What is shareholders profit? Ratio Ratio ROE ROE Formula Formula == What WhatItItDoes Does Measures Measuresthe thereturn returnon onordinary ordinary shareholders funds: shareholders funds: Profit ProfitAfter AfterTax Taxa Ordinary OrdinaryFunds Fundsa a.a. Issued Issuedcapital capital++capital capitalreserves reserves++revenues revenues reserves reserves Assesses Assessesthe theefficiency efficiencywith withwhich whichthe thefirm firm employs employsowners ownerscapita capita Measures Measuresreturn returnfor forshareholder shareholder Drivers Drivers Profit Profitmargin: margin: Price Price Cost Cost Asset Assetturnover: turnover: Sales Sales Capital Capitalemployed employed Financing: Financing: Profit after tax used because it is the return from which dividend is subtracted. Debt Debttotoequity equityratio ratio Cost Costofofdebt debt Tax-effectiveness Tax-effectiveness Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm

- 66 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Financial ratio analysishow to do it Key Strategic Ratios (3/5) Profitability/Efficiency Ratios (cont.) Current Ratio: Will the company have sufficient cash in the immediate future to meet its short-term liabilities? Ratio Ratio Current CurrentRatio Ratio Formula Formula What WhatItItTells Tells == Current CurrentAssets Assets Current CurrentLiabilities Liabilities Indicates Indicatesaacompanys companysshort-term short-term financial financialposition: position: i.e.: i.e.:(cash (cashand andnear-cash near-cashassets assets available availableto tobusiness) business)over over (upcoming (upcomingcash cash requirements) requirements) Compares Comparesthe theassets assetsthat thatwill willturn turninto into cash cashwithin withinthe theyear yeartotothe theliabilities liabilitiesthat that must mustbe bepaid paidwithin withinthe theyear year AAcompany companywith withaalow lowcurrent currentratio ratiolacks lacks liquidity in the sense that it cannot liquidity in the sense that it cannotreduce reduce its itscurrent currentasset assetinvestment investmenttotosupply supplycash cash totomeet meetmaturing maturingobligations: obligations: ItItmust mustrely relyinstead insteadon onoperating operatingincome incomeand and outside outsidefinancing financing The Themost mostinformative informativefeature

featureof ofaa current currentratio ratiois isits itsnormal normallevel leveland andany any trend from year to year trend from year to year Drivers Drivers Nature Natureof ofthe theindustry: industry: Some Somehave havetotocarry carrylarge largestocks stocks and, and,have havelong longproduction production cycles cycles Others Otherscarry carryalmost almostno nostock stock and andreceive receivemore morecredit creditthan than they theygive give Type Typeof ofcurrent currentasset: asset: Some Someare aremore moreliquid liquid(i.e. (i.e. easier easiertotosell sellreadily) readily) Volatility Volatilityof ofworking workingcapital capital requirements requirements Debtor Debtorand andcreditor creditor management: management: Bargaining Bargainingpower powerofofcompany company Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 67 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Financial ratio analysishow to do it Key Strategic Ratios (4/5) Solvency Ratios Debt to Equity ratio (D/E): What is the mix of funds in the balance sheet?: The D/E turns up under many different names and with different methods of calculation, which causes some confusion. Ratio Ratio Formula Formula What WhatItItDoes Does D/E 1. Total D/E 1. TotalDebt

Debt Total Equity Often referred to as Total Equity Often referred to as leverage leverageor orbearing bearing Where: Where: Debt Debt==long-term long-termliabilities liabilities++ current liability current liability and and Equity Equity ==ordinary ordinaryfunds funds ==Issued Issuedcapital capital ++capital capitalreserves reserves ++revenue revenuereserves reserves 2. 2. Total Totaldebt debt Total Totalfunds funds Where: Where: Total Totalfunds: funds: = Fixed assets + current assets = Ordinary funds + long-term liabilities + current liabilities Makes Makesaacomparison comparisonbetween: between: Funds Fundsthat thathave havebeen beensupplied suppliedby bythe the owners owners(equity). (equity). Funds Fundsthat thathave havebeen beenborrowed borrowed(debt). (debt). Defines Defineslevel levelof ofsafety safetyto tolender: lender: Measures Measuresaacompanys companysability abilityto towithstand withstand operating operatingsetbacks. setbacks. Typically Typicallyhigh highleverage leverageequates equatesto tohigh high financial risk, as debt is paid prior financial risk, as debt is paid priorto to shareholders shareholdersequity equitywhen whenaacompany company is iswound woundup. up. This Thisis

isaafundamental fundamentalratio ratio Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm Drivers Drivers Debt Debtand andits itsnature, nature,i.e.: i.e.: Long-term Long-termloans loansonly, only,vs. vs. Longand short-term Long- and short-termloans loans(i.e. (i.e. all allinterest-bearing interest-bearingdebt), debt),vs. vs. Long-term Long-termloans, loans,plus plusall allcurrent current liabilities liabilities There Thereis isan anoptional optionalleverage leverage for a given business for a given businessrisk risk one oneof ofthe thedrivers driversis ishence hence industry industryor orcompany companyrisk. risk. Tracking leverage Tracking leverageover overaa period periodshows showswhen whenthe the company is exposing company is exposing shareholders shareholdersto tomore morerisk. risk. Some businesses shy-away Some businesses shy-away from frominvesting investingdebt, debt,and and under-leverage. under-leverage. - 68 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Financial ratio analysishow to do it Key Strategic Ratios (5/5) Investment Ratios These ratios are indicative of the markets perception of the company: They are used mainly by investors to value the firm. They reflect a companys performance and expectations of future performance. They do not explain what has happened operationally or in terms of financial structure. Ratio Ratio Pricing-Earning Pricing-EarningRatio Ratio (PE) (PE) Earning

Earningper perShare Share (EPS) (EPS) Formula Formula What WhatItItDoes Does Widely Widelyquoted quotedparameter parameterof ofshare sharevalue value Value is determined by investors based Value is determined by investors based on oncompanys companysability abilityto todeliver deliveraagood good return Share returnto tothe theequity equityshareholder shareholder Shareprice priceto tobe befound foundin inthe the Financial Provides FinancialTimes Times Providesaaquick quickindication indicationof ofwhether whether aacompany Alternatively companyis israted ratedhighly highlyor orlowly lowly Alternativelystated statedas: as: Indicates Market Indicatesexpected expectedgrowth growth(relative (relativeto to MarketCapitalisation Capitalisation other companies or the stock market in other companies or the stock market in Profit After Tax Profit After Tax general) general) Share SharePrice Price EPS EPS Profit ProfitAfter AfterTax Tax Number Numberof ofShares Shares Profit ProfitAfter AfterTax Taxof ofshare shareto tobe be found foundin inthe thenotes notesto

tothe the financial financialstatements statements Drivers Drivers Investors Investorsview viewof offuture future return returnon onequity equitycompared compared with withthis thisyears yearsearning earningper per share share Level Levelof ofstock stockmarket market Absolute Profit Absoluteamount amountof ofEPS EPStells tellsnothing nothing Profit about aboutaacompanys companysperformance performance However, However,growth growthin inearnings earningsper pershare share has hasaasignificant significantimpact impacton onmarket marketprice price Investors look for stability as well as Investors look for stability as well as growth growth Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 69 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Financial ratio analysishow to do it Other Ratios (1/4) Profitability/Efficiency Ratios These ratios must be used selectively, according to the business and/or the level of detail required. Ratio Ratio Inventory InventoryTurnover Turnover Days DaysInventory Inventory (also (alsocalled calledstock stockturns) turns) Total TotalAsset AssetTurnover Turnover Formula Formula What WhatItItTells Tells Cost Costof ofGoods GoodsSold Sold Ending EndingInventory Inventory Helps Helpsto

totell tellwhether whetheran anappropriate appropriatelevel levelof of stock is held: stock is held: 365 365 Inventory InventoryTurnover Turnover Measures Measuresthe thenumber numberof ofdays daysrequired requiredto to sell sellthe theinventory inventoryonce once Sales Sales(volume) (volume) Size Sizeof ofinventory inventory Sales Sales Total TotalAssets Assets Indicates Indicateshow howwell wellaacompany companyuses usesits its assets: assets: Sales Sales(volume, (volume,price) price) Assets: Assets: Measures Measureshow howoften oftenan aninventory inventoryitem itemturns turnsover over per peryear year(or (orhow howmany manytimes timesitithas hasbeen beensold) sold) Measures Measuressales salesgenerated generatedby byeach eachunit unitofofassets assets Measures Measurescapital capitalintensity: intensity: AAlow lowasset assetturnover turnoversignifies signifiesaacapitalintensive capitalintensive business business AAhigh highturnover turnoversignifies signifiesaabusiness businessthat thatisisnot not capital-intensive capital-intensive Days DaysReceivable Receivable (also (alsocalled calleddebtor debtordays) days)

Fixed FixedAsset AssetUtilisation Utilisation Drivers Drivers Sales Sales(volume) (volume) Inventory: Inventory: Size Size Appropriateness Appropriateness Fixed Fixed Inventories Inventories Accounts Accountsreceivable receivable Accounts AccountsReceivable Receivable Sales Sales Measure Measureof ofhow howlong longitittakes takesaacompany companyto to collect collectwhat whatititisisowed owed Monitors Monitorscredit creditcontrol controldepartment department effectiveness effectiveness Collection Collectionperiod period Sales Sales Fixed FixedAssets Assets Measures Measureshow howwell wellplant, plant,buildings, buildings,etc, etc,are are utilised utilised Heavily Heavilyinfluenced influencedby bynature natureof ofindustry industryso so seldom seldomused used Sales Sales(volume, (volume,price) price) Assets: Assets: Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm Level Level Valuation Valuation - 70 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Financial ratio analysishow to do it Other Ratios (2/4) Liquidity Ratios Ratio Ratio Formula Formula What WhatItItDoes Does Quick QuickRatio Ratio(acid (acidtest)

test) Current CurrentAssets AssetsInventory Inventory Current CurrentLiabilities Liabilities Tests Testswhat whatwould wouldhappen happenififthe the company companyhad hadto tosettle settleup upwith withall allits its creditors and debtors immediately: creditors and debtors immediately: Drivers Drivers Nature Natureof ofthe thecompanys companys business business(see (seecurrent currentratio) ratio) IfIfthe thequick quickratio ratioisisless lessthan than11ititwould wouldbe be unable unableto tosettle settlequickly quickly IfIfaaratio ratiois islow lowand anddeclining decliningititpoints pointsto to aarising risingoverdraft overdraft Working WorkingCapital Capitalto to Sales SalesRatio Ratio Current CurrentAssets Assets Current Liabilities Current Liabilities Sales Sales Where: Where: Working Workingcapital capital==(current (currentassets assets current currentliabilities) liabilities) Shows Showshow howmuch muchcapital capitalis isrequired requiredto to Nature Natureof ofthe thecompanys companys finance business financeoperations operationsin inaddition additionto tocapital capital business(see (seecurrent currentratio) ratio) invested in fixed

assets invested in fixed assets AAfalling fallingratio ratioindicates indicatesthe thepossibility possibility of over-trading (insufficient of over-trading (insufficientresources resources in inthe thebalance balancesheet sheetto tocarry carrythe thelevel levelof of existing existingbusiness) business) Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 71 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Financial ratio analysishow to do it Other Ratios (3/4) Solvency Ratios Ratio Ratio Interest InterestCover Cover Formula Formula What WhatItItDoes Does PBIT PBIT Interest Interest Where: Where: PBIT PBIT==Profit ProfitBefore BeforeInterest Interest and Tax and Tax Interest Interestbeing beingthe thecost costof of financing (item of the financing (item of theProfit Profit and andLoss LossAccount) Account) The cover The coveris isexpressed expressedas as so many times so many times Drivers Drivers Measures Measuresaacompanys companysability abilityto toservice service Operating Operatingprofit profit its Total amount itsborrowing borrowing Total amountborrowed borrowed Rate Rateof ofinterest interest Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 72 - DRAFT

COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Financial ratio analysishow to do it Other Ratios (4/4) Investment Ratios Ratio Ratio Dividend DividendYield Yield Formula Formula What WhatItItDoes Does Important Importantratio ratiofor forboth boththe theinvestor investor and andthe thecompany company Yield Yieldratios ratiosallow allowinvestors investorsto tomake make comparison between the return on DPS = dividend per share (see comparison between the return on DPS = dividend per share (see shares below) sharesand andother othertypes typesof ofinvestment investment below) DPS DPS Share SharePrice Price Drivers Drivers Profit Profit Financing Financingstructure structure (reinvestmentdividend (reinvestmentdividendonly) only) EPS Share Price Earning per Share EPS = Earning Per Share (see Key Strategy ratios, p. xx) Dividend DividendCover Cover Dividend DividendPer PerShare Share EPS EPS DPS DPS Indicates Indicatesfuture futurestability stabilityand andgrowth growthof of dividend: dividend: Profit Profit Reinvestment Reinvestment Profit Profitavailable availableafter afterreinvestment reinvestmentin in company company

Important Importantfor forthe themany manyof ofinvestors investors who whoare arekeen keento tosee seesteady steadydividends dividends Profit Profit Reinvestment Reinvestment High Highcover coversuggests suggestsdividend dividendisisfairly fairlysafe safe Also indicates company is aiming Also indicates company is aimingfor forhigh high growth growth a Dividends Dividendsa Number Numberof ofShares Shares a.a. InInProfit Profitand andLoss Lossaccount. account. b.b. InInnotes notestotothe thefinancial financialstatements. statements. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 73 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Financial analysis illustrative output Cashflow, m, 19831994 80 Trends in ratios can similarly be plotted 60 40 Tax Dividends Interest Capex (Net) Changes in working capital Other / Extraordinary items Depreciation PBIT Net Cashflow Cumulative Cashflow 20 0 -20 -40 -60 -80 -100 1983 84 85 86 87 88 89 90 91 92 93 94 Source: Dawson International; see also further examples in document 1232Ldn23Jun94Dl-db. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 74 -

DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Financial ratio analysisillustrative output A Dupont Treea (also known as RONA model) is a useful way to structure and present output. Levers RONA/Dupont Model Shareholder Value UK External Sales EU and EFTA Sales Margin Margin Gross Sales Total Turnover Rest of World Sales Trading Profit Intras-Group Sales Sales Raw Materials & Consumables Cost of Sales Total Costs Subsidiaries Results Maintenance Sale of Fixed Assets External Costs Stock Revaluation Other Operating Costs Taxes Interest Total Employment Costs Costs PAT PBIT RONA Sale of Subsidiaries Depreciation and Grant Costs Carriage RONOA Exceptional Items Intra-Group Materials Loose Plant, Spares & Tools Raw Materials Other Intra-Group Costs Tangible Assets Fixed Assets Stocks Finished Goods Short Term Investments Trade Debtors Debtors Trade Creditors Creditors (<1 year) Net Assets Creditors (<1 year) Work in Progress Asset Asset Base Base Net Operational Assets Provisions and Accruals Working Capital Cash / Loans

Investments Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 75 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Financial ratio analysistop tips Potential Potential Insight Insight The The ratios ratios are are useful usefulwhen whenviewed viewedover overtime time or orcompared comparedwith withother other companies (usually in the same industry): companies (usually in the same industry): Analysing Analysing over overfive fiveyears yearshelps helps smooth smooth ups upsand anddowns downs Ratio Ratio analyses analyses are are aakey key input inputto to aacomparison comparisonof ofcompetitors competitors Do: Do: Look Lookfor fordivisional divisionaldata datawhen whenanalysing analysingdiverse diversemulti-product multi-productconglomerates conglomerates Look for industry-specific ratios Look for industry-specific ratios Be Bewary waryof ofmanagement managementmanaging managingend-of-year end-of-yearfigures figures Find out what the terminology used means: Find out what the terminology used means: Hints Hints and and Pitfalls Pitfalls US USand andEuropean Europeanterminology terminologydiffer differ Accounting principles Accounting principlesdiffer, differ,making makingcomparisons comparisonsdifficult difficult Always Alwaystreat treatthe thenotes notesand andmain mainstatements statementsas

asinseparable: inseparable: You Youneed needboth bothtotoget getthe thejob jobdone doneproperly properly Always Alwayslook lookfor fortrends trendsand anddifferences differencesover overtime time(5 (5years) years) Try to obtain comparative data on companies in the same Try to obtain comparative data on companies in the sameindustry industry(international (international comparisons comparisonscan canbe behard hard(especially (especiallyGermany), Germany),due dueto todifferent differentaccounting accounting principals) principals) Make Makesure sureyou youare arecomparing comparinglike likewith withlike like Ask the questions Why and So what? Ask the questions Why and So what? Dont: Dont: Ever Everdraw drawconclusions conclusionsfrom fromone oneparameter parameter Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 76 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Financial ratio analysisdata sources, case examples, and related analytics Data Data Sources Sources Company Company reports reports (annual (annualreport, report,IOK IOKin inUS) US) Analysts Analysts reports reports Industry Industryreports reports (e.g. (e.g. ICC ICCin inUK UKfor for ratio ratio reports) reports) SEC SEC(Securities (Securities Exchange Exchange Commission, Commission, USA) USA) Case Case Examples Examples

The following documents provide training material: How to Understand and Use Company Accounts, (Strategic Research Kbase)i Financial Analysis, Using and Interpreting Ratios, August 1998 (Consultant Group KBase) St Gallen University training (in German POA) Financial analysis (A&D Kbase) Related Related Analytics Analytics Cost Coststructure structure analysis analysis Business Businesscase case (see (see A&D A&DKbase Kbase for fortraining trainingmaterial) material) Financial Financial analysis analysis spreadsheet spreadsheetmodel model --Sten-Erik Sten-ErikMolander Molander (3584139) (3584139) Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 77 - Competitors/Industry Stream Analytics Introduction Value Chain Market/Sizing and Share Financial/Ratio Analysis Company/Competitor Analysis SWOT Analysis PEST Analysis Porters Five Forces Growth Share Matrix Key Success Factors Conclusions DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Company/competitor analysisintroduction Why Why We We Use Use ItIt What What ItIt Is Is An assessment of a companys own (or competitors) performance that should, at the least, include: Background Backgroundinformation: information: Date Datefounded founded Overview Overviewof ofwhat whatthe thecompany companydoes does Executive team Executive team Vision Visionstatement statement Ownership Ownershipstructure structure Organisation Organisationstructure: structure:

Size Sizeof ofsubsidiaries subsidiariesworkforce workforce Key financials: Key financials: Current, Current,historical, historical,and andprojected, projected,(see (seefinancial financial analysis) analysis) Market Marketpositioning: positioning: Market Marketshare, share,geographical geographicalmarkets, markets,target targetcustomer customer segments segments Channel Channelusage: usage: Percentage Percentagethrough througheach, each,productivity productivity Product portfolio: Product portfolio: Main Mainproducts products Price Pricebrackets brackets Relationship Relationshipto toindustry industryvalue valuechain: chain: Key suppliers and customers Key suppliers and customers Distribution Distributionchannels channels Recent Recentactions/moveslate actions/moveslatebreaking breakingnews news Strategic issues and behaviour Strategic issues and behaviour Provides Providesaabasic basicunderstanding understandingof ofaacompany companyand andits itsperformance performance Directs further analysis by highlighting key strengths Directs further analysis by highlighting key strengthsand andcapabilities capabilities Use Useof ofaacommon commontemplate templatecan canenable enableaacomparison comparisonbetween betweenplayers players Identify number, names and focus of players Identify number, names and focus of players Understand Understandstrategic strategicpositions positions(product/service (product/serviceoffering, offering,channel channelusage) usage)

Identify Identifystrengths strengthsand andweaknesses weaknessesof ofdifferent differentplayers playersin inan anindustry industry Identify Identifygaps gapsin inportfolios portfoliosand andcapabilities capabilitiesof ofclient client Identify relative strength of client company Identify relative strength of client company Understand Understandkey keycompetitor competitormoves moves Strengths Strengths & & Limitations Limitations Strengths: Strengths: Gives Givesaaclear clearoverview overviewof ofbasic basicfacts factsabout aboutaacompany: company: Necessary Necessarytotoadd addinsight insighttotocompetitor competitoror ormarket marketanalysis analysis Provides Providesdirection directionto tofurther furtheranalysis analysis Efficient Efficientway wayto tocapture capturevital vitaldata dataon oncompetitors competitors Gives Givesoverview overviewof ofcompetitors competitorsattributes attributesalong alongmultiple multipleaxes axes Limitations: Limitations: May Mayprovide providefew fewinsights insightsin initself: itself: Requires Requiresbenchmarking benchmarkingover overtime timeor oragainst againstcompetitors competitors Often Oftencomplex complexand anddifficult difficultto touse useeffectively effectivelyin inpresentations: presentations: Need Needtotoextract extractkey keymessages messagesand anddisplay displayusing usingother othertools tools Requires

effort to summarise Requires effort to summarise Often Oftenfocuses focuseson onthe thepresent presentrather ratherthan thanthe thefuture: future: Difficult Difficulttotodetermine determinecompetitors competitorsstrategic strategicshifts shifts Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 79 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Company/competitor analysishow to do it Acquire Acquire aa Basic Basic Understanding Understanding of ofthe the Company/Industry Company/Industry Read Readgeneral generalinformation information about aboutthe thecompany companyon onits its Internet site Internet site Read Readintroduction introductionto to analysts analystscompany company reports reports Establish Establishwhere whereititfits fitsin in the value chain the value chain Determine Determinedata dataneeded needed Ensure Ensureall allnecessary necessary background backgroundinformation information is isincluded included Include Includeinformation information related relatedto tothe thestrategic strategic issue being issue beingexamined examinedby by the theproject project Gather Gather and and analyse analyse data data Evaluate Evaluate Company Company There Thereare areaawide widevariety varietyof of sources available sources available Analyse

Analysedata datawhere where appropriate: appropriate: Use Usefinancial financialanalysis analysis techniques techniques Product/channel Product/channelanalysis analysis Understand key trade-offs Understand key trade-offs that thatcompetitors competitorsin inan an industry have: industry have: e.g. e.g.niche nichevs vsscale scale Plot Plotcompetitor competitorfield fieldmaps maps Understand relative Understand relative competitive competitivepositions positionsand and rationale: rationale: Product/Service Product/Serviceofferings offerings Channel usage Channel usage Depending Dependingon onwhat whatwe we need to know, use need to know, useSWOT SWOT model modelto tohelp helpevaluate evaluate competitor competitor Ensure Ensureanalysis analysisrelates relates to, or answers to, or answersthe the questions, questions,we weare aretrying trying to answer to answer Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 80 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Company/competitor analysisillustrative output Company Profile Template (Tailored to Specific Use) Henry Cooke Lumsden plc Competitive Field Map COMPETITOR PROFILES: HENRY COOKE LUMSDEN PLC Target Target Customers Customers Examples Examples of of Institutional Institutio nal Customers Customers Private Private clients clients Charities/Trusts Charities/Trusts

Pension PensionFunds Funds Corporates Corporates Chase Seeks Major money domestic centre focu s; relationship s supplement ed with partn er banks Examples Examples of of Product Product Pricing Pricing Financial Financialplanning planningand andtax tax reporting reporting PEPs PEPs Dealing Dealingonly: only: Portfolio PortfolioManagement Management (discretionary (discretionary and andadvisory) advisory) Corporate Corporate Finance Finance Pension Pensionplanning planning Dealing Dealingwith withadvice: advice: Institutional broking Institutionalresearch researchand and broking Minimum Minimumcommission: commission: Commission Commissionoo nnba barga rgaininofof25,000: 25,000: Minimum Minimumcommission: commission: Commission Commissionoo nnba barga rgaininofof25,000: 25,000: Minimum Minimumsize: size: None None Minimum Minimumcommission: commission: Annua Annual lfee fee(red (red ucing ucingsca scale): le): 25 25 0.4% 0.4% Discretionary Discretionaryand andadvisory advisoryportfolio portfoliomanagement: management: Telephone Telephone Mainly Mainlyface-to-face face-to-face No

Nodirect directmailing mailing Productivity Productivity Gemini Consulting Limited Proprietar Serve both local and cross-b order Citibank businesses well BofA Local Scale Minimum 40 Minimumcommission: commission: 40(bo (bo th) th) Commission 267 Commissionoo nnaabbarg argain ainoof 25,000: f 25,000: 267 Minimum Minimumportfolio portfoliosiz siz ee(b (both othddiscretiona iscretionaryryaand ndaadvisory): dv isory): 50,000 50,000 Distribution Distribution Channels Channels Selling Selling Lead tion Lead Genera Genera tion Asian Focu s 25.00 25.00 241.00 241.00 Discretionary DiscretionaryPortfolio PortfolioManagement: Management: BKB Stan.Chart. 25.00 25.00 241.00 241.00 AAtelephone telephoneinterview interviewinformation informationdiffered differedin: in: Referrals Referrals Solicitors Solicitors Other Otherprofessional professionalfirms firms Accountants Accountants Networked Oxford OxfordMolecular MolecularGroup Groupplc plc North NorthAnglia AngliaEducation Educationplc plc Products/Services Products/Services Competitive Field map 4:Multi-local vs. Global 150 150small smalland andmedium mediumsized

siz edcompanies companies Centers International Centers InternationalLtd Ltd Deutsche German-centric Focus: European companies Maintaining Maintaining Telephone Telephonecontacts contacts Once Onceaayear yearcontact contactfor fornon-active non-activeclients clients Regular Regularvaluation valuationand andmarket marketreports reports y and Confidential Global Scale HSBC HSBC ABN AMRO Islands -2- Disc/GTS/Ldn5Feb97Rp-ns/sc Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 81 - DRAFT COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Company/competitor analysistop tips Potential Potential Insights Insights Hints Hints and and Pitfalls Pitfalls Provides Providesan anoverview overviewof ofwhat whatthe thecompany companyisisabout, about,and andan anindication indicationof ofsuccess successto todate: date: Directs further analysis Directs further analysis Drives Drivesinsights insightswhen whenbenchmarked benchmarkedagainst againstcompetitors competitors(see (seecompetitors competitorscomparison) comparison) Identifying competitors strengths and weaknesses helps us to understand Identifying competitors strengths and weaknesses helps us to understandthreats threatsand andopportunities opportunitiesfor forour ourclient client Must tie in with KSFs

for industry Must tie in with KSFs for industry Do: Do: Use Usecreativity creativityin indata datagathering gatheringififinformation informationisisnot notreadily readilyavailable available Ensure Ensureyou youuse usean an80/20 80/20rule: rule: You Youcan cando domuch muchofofthe theanalysis analysisvery veryquickly, quickly,then thenfill fillonly onlycritical criticalgaps gapsafter afterthat that Gain Gainbasic basicknowledge knowledgeabout aboutthe thecompany companyat ataavery veryearly earlystage: stage: Obtain/produce Obtain/producean anoverview overviewofofthe thecompanys companysactivities activities Pay Payparticular particularattention attentiontotorevenue revenue Check Checkwith withyour yourclient clientififyou youhave havenot notused usedthe theclients clientsown owndata data Consider Consideroutsourcing outsourcingto toshop shopor orinstitute institute Focus Focuson onmajor majorplayers playersififthe themarket marketisishighly highlyfragmented, fragmented, Remember that competitors definition of Remember that competitors definition ofsegments segmentsoften oftendiffer differ Draft Drafttemplate templateearly earlyin inthe theanalysis analysisprocess: process: Use Useas asaaframework frameworkfor fordata datacapture captureand andtotodirect directfurther furtheranalysis analysis Be Beclear clearabout aboutwhat whatinformation

informationisisnecessary: necessary: Keep Keepininmind mindwhy whyyou youare areconducting conductingthis thisanalysis, analysis,and andstructure structureand andcollect collectdata dataaccordingly accordingly Display findings to create an impact: Display findings to create an impact: Use Usesymbols symbolsand andgraphics graphicstotodisplay displaythe themessage message Shade Shadethe thekey keyfindings findingson onthe thetemplate template Dont: Dont: Give Giveunnecessary unnecessaryexcessive excessivedetail: detail: Avoid Avoidincluding includingirrelevant irrelevantdata data Indulge Indulgein indata datadumping dumping Make Maketemplate templateunnecessarily unnecessarilycomplex complex Fail Failto toinclude includeall allrelevant relevantcompetitors competitors Take Takefor forgiven givenwhat whatthe thecompany companysays saysare areits itsstrengths: strengths: May Maynot notbe beininreality reality May Maybe beassociated associatedwith withcorollary corollaryweaknesses weaknesses Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 82 - COMPETITORS/INDUSTRY STREAMCORE ANALYTICS Company/competitor analysisdata sources, case examples, and related analytics DRAFT Data Data Sources Sources Case Case Examples Examples

Strategic StrategicResearch ResearchKbase, Kbase,Understanding Understandingthe theStrategies Strategiesof ofMobile MobileOperators Operatorsin inHong HongKong, Kong,Sweden, Sweden,and andthe the UK. UK. three threedocuments documents(London (LondonShop, Shop,October October1997): 1997): Annual Annualreport report Analysts Analystsreports reports Internet Internetsites sites On-line On-linesearches searches Internal Internalcompany companydata data(if (ifavailable) available) Interviews Interviews Trade Tradeassociations associations Industry Industryoverview overview Industry Industryjournals journals Industry Industryexperts experts(Gemini (Geminiand andexternal) external) Basic Basiccompany companyprofiles profilesofofmajor majormobile mobileoperators operators Financial Financialservices servicesKbase, Kbase,Global GlobalTransaction TransactionServices Services(Competitor (CompetitorAnalysis) Analysis) The Thefollowing followingdocuments documentscontain containgood goodcase caseexamples examplesof ofcompetitors competitorscomparison comparisonanalysis analysisand andoutput: output: Michael MichaelM. M.Kaiser, Kaiser,Associates AssociatesInc., Inc.,Understanding Understandingthe theCompetition: Competition:AAPractical PracticalGuide GuidetotoCompetitive CompetitiveAnalysis. Analysis. Strategic Research K Base, Succeeding in the UK Private Banking Market, (London Shop, Strategic Research K Base, Succeeding in the UK Private Banking Market, (London Shop,20/02/98) 20/02/98)pp. pp.86-99. 86-99.

Telcos Telcosin inUS USmarket market(VIAG), (VIAG),Cambridge CambridgeShop Shop Related Related Analytics Analytics Company/competitor Company/competitoranalysis analysisis isoften often the thecentre-piece centre-piece of ofstrategic strategic position positionassessment assessment However, However, ititcan canbe becomplemented complemented and andsupplemented supplemented by by the thefollowing following analytics: analytics: Financial Financialanalysis/ratios analysis/ratiosanalysis analysis Porters five forces Porters five forces SWOT SWOT Scenario Scenario planning/war planning/wargaming gaming Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 83 - Competitors/Industry Stream Analytics Introduction Value Chain Market/Sizing and Share Financial/Ratio Analysis Company/Competitor Analysis SWOT Analysis PEST Analysis Porters Five Forces Growth Share Matrix Key Success Factors Conclusions DRAFT COMPETITORS/INDUSTRY STREAMSUPPLEMENTARY ANALYTICS SWOT analysisintroduction Why Why We We Use Use ItIt What What ItIt Is Is The The SWOT SWOT (Strengths-Weaknesses/ (Strengths-Weaknesses/ Opportunities Opportunities and and Threats) Threats)analysis analysis is

is one one of the earliest strategy frameworks: of the earliest strategy frameworks: Derives Derives insight insightinto intoaa companys companyscompetitive competitive position. position. Developed Developedininthe the1960s 1960sat atHarvard HarvardBusiness BusinessSchool School by byLearned, Learned,Christensen, Christensen,Andrews, Andrews,and andGuth. Guth. Gives Givesbasic basicdirections directionsfor forstructuring structuringstrategic strategic analysis. analysis. The The underlying underlying theory theory is isthat thatassessment assessment of competitive position should of competitive position should combine combine both bothan an external external and andan aninternal internal analysis: analysis: Internal Assessment External Assessment Weaknesses Strengths Opportunities Threats Strategic Choices Strengths Strengths & & Limitations Limitations Strengths: Strengths: Provides Providesaagood goodsummary. summary. Efficient for expository Efficient for expositorypurpose. purpose. Limitations: Limitations: Needs Needsto tobe becompared comparedto tohow howindustries industriescreate createvalue valuei.e. i.e.what what are the industry CSFs are the industry CSFs Better Betteras asaafacilitative facilitativetool toolthan thananalytic analytic

Client Clienthas hasoften oftenalready alreadydone donethis thisanalysis analysis Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 85 - COMPETITORS/INDUSTRY STREAMSUPPLEMENTARY ANALYTICS DRAFT SWOT analysishow to apply it Relying on findings from related analytics, produce an overview of: The companys strengths and weaknesses, regarding in particular: Value chain Financials Organisation Capabilities Portfolio Opportunities/threats in the industry, focusing in particular on: Competitors moves (past/current/forecasted). Prioritise each element after validation with JTMs and industry experts: Greatest strengths and opportunities. Most important weaknesses and threats. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 86 - DRAFT COMPETITORS/INDUSTRY STREAMSUPPLEMENTARY ANALYTICS SWOT analysisillustrative output Company: A Strengths Weaknesses 2 strong products High production costs Dynamic management team Geographical position Opportunities Growing Asian markets Diversification into service Threats Competition in ex-USSR Increasing demand for service Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 87 - DRAFT COMPETITORS/INDUSTRY STREAMSUPPLEMENTARY ANALYTICS SWOT Analysistop tips Potential Potential Insights Insights Analytic Analytic key keyto toobtain obtainaaquick quickgrasp graspof ofthe thecompanys companysposition positionin inits itsindustry: industry: Hints Hints and and Pitfalls Pitfalls Do: Do:

Start Startby bydefining definingthe themarket marketand andboundaries. boundaries. Access all client data. Access all client data. Call Callmarket marketresearch researchfirms firmsfor forfree freecontents contentspages pagesof oftheir theirreports. reports. Focus on trends (what's changing? why?) Focus on trends (what's changing? why?) Limit Limitthe thenumber numberof ofelements elementsin ineach eachsection section(max (max5) 5) Data Data Sources Sources Competitors Competitors analysis analysissources. sources. Clients Clientsmarket marketresearch researchdata. data. Market Marketresearch research firms. firms. Focused market interviews. Focused market interviews. Database Databasesearches. searches. Case Case Examples Examples The The following followingdocuments documentscontain containgood goodexamples examples of ofSWOT SWOTanalysis analysis and andoutput: output: Related Related Analytics Analytics Porters Porters five five forces forces PEST PEST Competitors Competitors comparison comparison Value chain Financial/ratio analysis Break-even analysis Capabilities Capabilities analysis analysis

Scenario modelling Highlight Highlightareas areasfor fordevelopment. development. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 88 - Competitors/Industry Stream Analytics Introduction Value Chain Market/Sizing and Share Financial/Ratio Analysis Company/Competitor Analysis SWOT Analysis PEST Analysis Porters Five Forces Growth Share Matrix Key Success Factors Conclusions COMPETITORS/INDUSTRY STREAMSUPPLEMENTARY ANALYTICS PEST (Political, Economic, Sociodemographic and technology) analysisintroduction DRAFT Why Why We We Use Use ItIt What What ItIt Is Is An Ananalytical analytical framework framework that thatassesses assesses the the impact of four major forces that shape an impact of four major forces that shape an industry, industry,i.e.: i.e.: Political Politicalforces forces Complement Complementother otherindustry industry analysis analysis frameworks. frameworks. Explain Explainongoing ongoing changes changes in inthe the industry. industry. Economic Economicforces forces Socio-demographic Socio-demographic forces forces Technology Technology forces forces The The PEST PEST framework:

framework: Presents Presentsthe the characteristics characteristics of ofeach each of of these forces (as well as their evolutions). these forces (as well as their evolutions). Explains Explains how howthose those forces forcesaffect: affect: Competitive Competitiveenvironment environment(as (asdescribed describedby byPorter Porter through his five forcessee related analytics). through his five forcessee related analytics). Industry Industryvalue valuechain. chain. Industry Industryfinancials. financials. Strengths Strengths & & Limitations Limitations Strengths: Strengths: Deals Deals with withdimensions dimensions such suchas as sociosociodemographics or policies that demographics or policies thatmay may be bekey keyto to some some industries. industries. Limitations: Limitations: Needs Needs to tobe be seen seen against againsthow howindustries industries create create value i.e. what are the industry CSFs value i.e. what are the industry CSFs Better Betteras as aa facilitative facilitative tool tool than than analytic analytic Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 90 - COMPETITORS/INDUSTRY STREAMSUPPLEMENTARY ANALYTICS DRAFT PEST analysistop tips Potential Potential Insights Insights Reveals Reveals key key trends trends and andissues issues in inthe theindustry, industry,e.g.: e.g.: Hints Hints and and Pitfalls

Pitfalls Do: Do: Focus Focus on on the the most mostsignificant significantaspect aspectififyou you do do not notintend intendto to deliver deliveraa thorough thorough industry industry analysis. analysis. Dont: Dont: Emerging/declining Emerging/decliningconstraints. constraints. New Newrules rulesof ofthe thegame. game. Lose Lose sight sightof offactors factors that thattruly truly influence influence your yourclients clients business business Data Data Sources Sources Case Case Examples Examples The The following followingdocuments documentscontain containgood goodexamples examples of ofPEST PESTanalysis analysis and andoutput: output: Related Related Analytics Analytics Analysts Analystsreports reports Industry Industry reports reports Database Databasesearches searches Industry Industry experts experts Porters Porters five five forces forces Value Value chain chainanalysis analysis Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 91 - Competitors/Industry Stream Analytics Introduction Value Chain Market/Sizing and Share Financial/Ratio Analysis

Company/Competitor Analysis SWOT Analysis PEST Analysis Porters Five Forces Growth Share Matrix Key Success Factors Conclusions DRAFT COMPETITORS/INDUSTRY STREAMSUPPLEMENTARY ANALYTICS Porters five forcesintroduction Why Why We We Use Use ItIt What What ItIt Is Is Porters Porters five fiveforces forces constitutes constitutes aa framework for analysing framework for analysingaa companys companys environment environment(or (orindustry industrystructure): structure): Porter Porterfirst first structured structuredthe the framework framework in inhis his 1980 1980 book book Competitive Competitive Strategy. Strategy. Porter Porterassumes assumes that thatcompetition competitionin in an an industry industry depends dependson onfive five basic basic forces: forces: Assess Assess attractiveness attractiveness on onthe the basis basis of ofcompetition competition in in an an industry. industry. Highlight Highlightareas areas in inwhich whichindustry industrytrends trendsmay may pose pose opportunities opportunities or or threats. threats. Analyse Analysewhere where the thecompany company stands standsvis-a-vis vis-a-visthe the underlying underlying causes causesof ofeach eachcompetitive competitive force.

force. To To understand/diagnose understand/diagnose levels levels of ofreturn. return. Potential Entrants Strengths Strengths & & Limitations Limitations Threat of new entrants Bargaining power of suppliers Industry Competitors Bargaining power of buyers Suppliers Buyers Rivalry Among Existing Firms Strengths: Strengths: Quite Quitecomprehensive comprehensiveframework. framework. Good starting point to Good starting point tounderstand understandkey key drivers drivers and and trends. trends. Threat of substitute products or services Substitutes Limitations: Limitations: Very Very often often used used strictly strictly qualitatively. qualitatively. Source: M.E. Porter, Competitive Strategy, 1980, p. 4 Free Press. The The collective collectivestrength strength of ofthese theseforces forces determines the ultimate profit determines the ultimate profitpotential potential and and allocation allocation in inthe the industry. industry. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 93 - DRAFT COMPETITORS/INDUSTRY STREAMSUPPLEMENTARY ANALYTICS Porters five forcespotential insight/output Several important economic and technical characteristics of an industry are critical to the strengths of each competitive force: Threat of New Entrants Barriers to entry: Economies of scale (including shared resources) Product differentiation (proprietary) Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale Government policy Expected reaction of incumbent Bargaining Power of Suppliers A supplier group is powerful when: It is dominated by a few companies and is more concentrated than the industry it sells to. There are no substitute products. The industry is not an important customer. Its products are important to the industry. Products are differentiated or suppliers have built up switching costs. It poses a credible threat of forward integration.

Exit Barriers L Entry Barriers H L Low, stable returns Low, risky returns H High, stable returns High, risky returns Intensity of Rivalry Intense rivalry results from: Numerous or equally balanced competitors Slow industry growth High fixed or storage costs Lack of differentiation or switching costs Capacity augmented in large increments Diverse competitors High strategic stakes High exit barriers Pressure from Substitute Products Search for products that can perform the same function. Assess buyers propensity to substitute. Focus on those that: Are improving their price performance trade-off compared with the industries products. Require low switching costs. Are produced by industries earning high profits. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm Competitive Advantage Lower Cost Competitive Scope Differentiation Broad Cost Leadership Differentiation Narrow Cost Focus Differentiation Focus Bargaining Power of Buyers A buyer group is powerful when: It is concentrated or purchases large volumes relative to seller sales. The products represent a significant fraction of the buyers costs or purchases. The products are standard or undifferentiated. It faces few switching costs. It earns low profits. It poses a credible threat of backward integration. The bought product is unimportant. It has full information. Take offensive or defensive actions to create a defensible position against the forces: Positioning the firm so its capabilities provide the best defence. Influencing the balance of forces through strategic moves. Anticipating shifts in the factors underlying the forces and responding to them. - 94 - COMPETITORS/INDUSTRY STREAMSUPPLEMENTARY ANALYTICS DRAFT Porters five forcestop tips Hints Hints and and Pitfalls Pitfalls Data Data Sources Sources Do: Do: Define Define precisely precisely the the industry industrybefore before conducting conductinganalysis. analysis. Quantify your findings where possible. Quantify your findings where possible.

Don't: Don't: Just Justuse use as asaa static statictoolshow toolshow trends trends in ineach eachof ofthe the areas. areas. Industry Industry reports reports Analysts Analystsreports reports Database searches Database searches See See also alsorelated related analytics analytics sources sources Case Case Examples Examples The The following followingdocuments documentscontain containgood goodexamples examples of ofPorters Porters five five forces forces analysis analysis and and output: output: Related Related Analytics Analytics PEST PEST SWOT SWOT Segment Segmentattractiveness attractiveness Product Productlife lifecycle cycle Product Productsubstitution substitution Competitors Competitors comparison comparison Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 95 - Competitors/Industry Stream Analytics Introduction Value Chain Market/Sizing and Share Financial/Ratio Analysis Company/Competitor Analysis SWOT Analysis PEST Analysis Porters Five Forces Growth Share Matrix

Key Success Factors Conclusions DRAFT COMPETITORS/INDUSTRY STREAMSUPPLEMENTARY ANALYTICS Growth share matrixintroduction Why Why We We Use Use ItIt What What ItIt Is Is Developed Developed by by BCG, BCG, the the growth growthshare share matrix displays graphically in a 2-by-2 matrix displays graphically in a 2-by-2 matrix matrix the theposition position of ofeach eachbusiness business of of aa companys portfolio or compares the companys portfolio or compares the position positionof ofplayers players in in one one industry. industry. The The growth growthshare sharematrix matrixis is based basedon onthe the use of industry growth and relative market use of industry growth and relative market share share (RMS) (RMS)as asproxies proxiesfor: for: The Thecompetitive competitiveposition positionof ofaafirm firmininits itsindustry industry (RMS). (RMS). The Theattractiveness attractivenessof ofthe thesegment segment(growth) (growth) The The matrix matrix has has the the following following quadrants quadrants which have different which have differentcash cash flow flow characteristics characteristics and andimplications: implications: Quadrant Star Star Cash Cashcows cows Dogs Dogs

Question Questionmarks marks Relative Share High High High High Low Low Low Low Market Growth High High Low Low Low Low High High The The key key idea idea is isthat that business business units units located located in each of the quadrants will be in each of the quadrants will be in in fundamentally fundamentally different differentcash cash flow flowpositions positions and should be managed differently. and should be managed differently. Provides Provides aa framework frameworkto tosuggest suggestthe the kind kindof of investment investmentstrategy strategy to tofollow followfor for each each business. business. Assess Assess trends trends in in the theevolution evolutionof ofaa companys companys portfolio of business (when matrix is portfolio of business (when matrix is drawn drawn for for both the current year and past years). both the current year and past years). Understand Understandthe the competitive competitive position positionof ofeach each business, possible cash requirements business, possible cash requirements and andfocus focus attention attention on on key key issues. issues. Strengths Strengths & & Limitations Limitations

Strengths: Strengths: Coherent Coherentand andsimple simpleframework. framework. Good starting point Good starting pointfor forthinking thinkingabout aboutaafirms firmsportfolio. portfolio. Limitations: Limitations: May Mayfuel fuelsimplistic simplisticconclusions: conclusions: The matrix assumes The matrix assumesthat thathigh highrelative relativemarket marketshare share automatically results in high cash generation. automatically results in high cash generation. This Thisisisnot nottrue trueininall allindustries. industries. Can lead to the interpretation Can lead to the interpretationthat thatcash cashgeneration generationisismore more important than profit generation. important than profit generation. Can Canalso alsolead leadto towrong wrongbehaviour, behaviour,i.e. i.e.milking milkingof ofcash cashcow cow when it needs investment (typically when industry when it needs investment (typically when industrychanges). changes). Very Veryrare rarethat thataacompanys companysbusinesses businessesare aretruly trulyindependent. independent. May Mayneglect neglectniche nichestrategies. strategies. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 97 - COMPETITORS/INDUSTRY STREAMSUPPLEMENTARY ANALYTICS DRAFT Growth share matrixhow to do it Steps: 1. Isolate business by defining the appropriate business segments. a 2. For each business, determine: Dollar scale. Market shares of the business and of its biggest competitors. Growth rate of the market in which the business operates. 3. For each business, calculate its relative market share (RMS):

RMS = Company market share Market share of biggest competitors 4. Draw the matrix, with a log scale on the horizontal axis and a regular scale on the vertical axis: Divide into quadrants, with the vertical line at 1.0 relative market share and the horizontal line at nominal GNP growth (12.5% in the example set out below). 5. Place each business in the matrix: The centre of the circle is at the intersection of the businesss relative share and its industry growth rate. The area of the circle is proportional to the businesss size. 6. If you wish to understand any trend, repeat steps 1 to 5 with data from previous years. a. See R Koch training material in South African POA for further analysis of business segment definition. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 98 - DRAFT COMPETITORS/INDUSTRY STREAMSUPPLEMENTARY ANALYTICS Growth share matrixillustrative output Example: Northwest Industries Major Business Area 1980 Revenues $ 3-Year Business Growth % 3-Year Industry Growth % 1980 Revenues of Largest Competitor $ Growth/Share Matrix 30% Relative Share 25% Tubular steel and ingot moulds 986.8 Component parts: 375.3 Connecting devices Lamp Ballasts Chemical Group: Consumer Group: 227.8 147.5 16.7 13 825 1.20 4.7 9 275 0.83 9.2 5 125 1.18 -1.6 6 400 0.48 193.2 Manufactured consumer products: Industry Growth (%) Industrial Group: 20%

15% Apparel Tubular Steel Beverages Batteries 10% Connecting Devices Apparel Batteries 866.9 Beverages 605.0 Total 261.9 2,876.4 454.2 13.3 15 250 7.1 11 225 59.7 14 500 2.42 5% Lamp Ballasts 1.16 Chemicals 0.91 4 1.5 1.0 .5 .25 Relative Share Source: Mac Group Core Practice manual, adapted from Michael M. Kaiser Associates. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 99 - DRAFT COMPETITORS/INDUSTRY STREAMSUPPLEMENTARY ANALYTICS Growth share matrixtop tips Potential Potential Insight Insight The The growth growthshare share matrix matrix suggests suggeststhe the following followingstrategies strategies for foreach eachbusiness business unit unittype: type: Expected Cash Characteristics of Each Quadrant of the Market Typical Strategic Prescriptions High Star Rate of market growth Low

Dilemma Cash in Balance Build/ hold share Cash Users (some + some -) Cash cows Dogs Cash generators Cash in Balance Hold share/ harvest Build Market Share selectively Do nothing if cash is positive Invest or turn to a star Divest if not critical SBU Withdraw Harvest Share Use to invest in other units (some + some -) High Low Relative market share (log scale) Hints Hints and and Pitfalls Pitfalls Typical Strategic Movement Prescriptions Strategic movements Cash movements Do: Do: Validate Validate your yourmarket market definition definition with withyour your client: client: It Itisiscritical criticalininmeasuring measuringboth bothrelative relativemarket marketshare shareand andindustry industrygrowth growthrate. rate. Dont: Dont: Use Useas asthe theonly onlygeneric genericmodeluse modeluseininconjunction conjunctionwith with other otheranalytics analytics(e.g. (e.g.scenario scenariomodelling) modelling) Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 100 - COMPETITORS/INDUSTRY STREAMSUPPLEMENTARY ANALYTICS Growth share matrixdata source, case examples, and related analytics Data Data Sources Sources DRAFT Publicly Publicly available available data data for for market

marketgrowth growth(see (see market market sizing) sizing)and and competitors competitors market marketshare. share. Clients Clientsinternal internaldata: data: Sales Sales Market Marketshare share Case Case Examples Examples The The following followingdocument documentcontains contains goods goods examples examples of ofgrowth growthshare share analysis analysis and andoutput: output: Related Related Analytics Analytics Segment Segmentattractiveness. attractiveness. Market-sizing. Market-sizing. Market Marketshare share measures. measures. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 101 - Competitors/Industry Stream Analytics Introduction Value Chain Market/Sizing and Share Financial/Ratio Analysis Company/Competitor Analysis SWOT Analysis PEST Analysis Porters Five Forces Growth Share Matrix Key Success Factors Conclusions DRAFT COMPETITORS/INDUSTRY STREAMSUPPLEMENTARY ANALYTICS Key success factors and index of key success factors introduction Why Why We We Use Use Them Them What What They They Are Are Key

KeySuccess SuccessFactor Factor(KSF): (KSF): Any Anydimension dimensionin inwhich whichexcellence excellenceis iscrucial crucial for forcompetitive competitivesuccess, success,for forexample: example: Parts Partsof ofthe themarketing marketingmix mix Research and Research anddevelopment development Low-cost Low-costmanufacturing manufacturing Also Alsoknown knownas asaacritical criticalsuccess successfactor factor(CSF) (CSF) Analysis of KSFs is crucial in most studies Analysis of KSFs is crucial in most studiesof of competitive competitivestrategies: strategies: Key Keysuccess successfactors: factors: Determines Determinesat atwhat whatcompanies companiesmust mustexcel excelto tobe besuccessful successfulin in aabusiness or segment business or segment They Theyshould shouldbe bethe thelogical logicaloutcome outcome(the (theso sowhat) what)of ofPEST, PEST, Porter Porteretc. etc.analysis analysis Index Indexof ofkey keysuccess successfactors: factors: Evaluate Evaluatecompetitors competitorsstrengths strengthsand andweaknesses weaknessesin inareas areas that thatare arecritical criticalto tosuccess success To Toposition positionour ourclient clientrelative relativeto tocompetitors competitors Skill Skillisisininidentifying

identifyingappropriate appropriateKSFs KSFs Index Indexof ofkey keysuccess successfactors: factors: AAsummary table that summary table thatscores scoresand andranks rankseach each competitor against the KSFs for the competitor against the KSFs for thebusiness business or orsegment segment Note: Note: The Theimportant importantinsights insightscome comefrom from understanding what is key understanding what is keyto tosuccess successin inthe the industry or segment: industry or segment: The Theindex indexisissimply simplyaadevice deviceto todisplay displaythe theoutput output Refer Referto tosection sectionon onindustry industrydynamics dynamics Strengths Strengths & & Limitations Limitations Benefits: Benefits: IfIfrigorously rigorouslyapplied, applied,clarifies clarifieswhat whatcapabilities capabilitiesor orskills skills companies companiesneed needto tocompete competesuccessfully successfully Index Indexallows allowsus usto toquantify quantifycompetitors competitorsrelative relative strengths against KSFs strengths against KSFs Index Indexprovides providesaastructured, structured,concise concisetechnique techniquefor for comparing competitors comparing competitors Drawbacks: Drawbacks: The TheKSFs KSFsand andcomparative comparativeindex indexare areonly onlyas asgood goodas as the

business understanding and judgement used the business understanding and judgement usedto to develop developthem them Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 103 - DRAFT COMPETITORS/INDUSTRY STREAMSUPPLEMENTARY ANALYTICS Key success factors and index of key success factors how to apply them Key Key Success Success Factors Factors Index Index of of Key Key Success Success Factors Factors Determining DeterminingKSFs KSFsrequires requiresaathorough thoroughunderstanding understanding of a business or segment, and of a business or segment, andtherefore thereforedraws drawson on several of other analytics in the toolkit. several of other analytics in the toolkit. Relevant Relevantissues issuesin inunderstanding understandingthe thebusiness businessor or segment segmentare: are: How Howcustomers customersbuy, buy,and andwhats whatsimportant importantto tothem themininthe the purchase purchasedecision: decision: See Seekey keypurchase purchasecriteria criteria Whos Whossuccessful successfulininthe thebusiness businessor oranalytic analyticsegment, segment,and and why. why. See: See: Company Companyanalysis analysis Financial Financialanalysis analysis Which Whichones onesare aremost mostimportant important How Howcompetitors competitorsperform performrelative relativeto toeach eachkey keysuccess successfactor factor

Ranking RankingKSFs, KSFs,and andscoring scoringcompetitors, competitors,requires requiresaa good understanding of the business or segments good understanding of the business or segments Key Keysteps stepsin inthe theprocess processfor forranking rankingand andweighting weighting KSFs: KSFs: Identify IdentifyKSFs KSFs(see (seebox, box,left) left) Give Giveeach eachKSFs KSFsaaweighting weightingreflecting reflectingits itsrelative relativeimportance importance (this (thisisisaanon-trivial non-trivialtask): task): How Howwould wouldyou youallocate allocateinvestment investmentresources resourcesfor foraacompetitor? competitor? Trends Trendswithin withinthe thebusiness businessor orsegment segment Other Othersources sourcesof ofinsights insightsinto intokey keysuccess successfactors factorsare: are: Clients Clientsexecutives/staff executives/staff Industry Industryanalysts analystsor orcommentators commentators The Thepurpose purposeof ofdeveloping developingan anindex indexof ofKSFs KSFsis isto to understand: understand: Determining DeterminingKSFs KSFsis isan aniterative iterativeprocess: process:initial initial research, research,developing developingdraft drafthypotheses, hypotheses,testing testingand, and, refining refiningthese thesehypotheses hypotheses Score Scoreeach eachcompetitor competitoragainst againsteach

eachkey keysuccess successfactor: factor: Document Documentthe therationale rationalefor foreach eachscore score Add Addup upthe thetotal totalscores scoresfor foreach eachcompetitor competitor Convert the total for each competitor Convert the total for each competitorinto intoaapercentage percentage(i.e. (i.e. what proportion of the perfect score it achieved?) what proportion of the perfect score it achieved?) The Theresulting resultingpercentages percentagesindicate indicatethe therelative relative performance of each competitor performance of each competitor Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 104 - DRAFT COMPETITORS/INDUSTRY STREAMSUPPLEMENTARY ANALYTICS Key success factors and index of key success factorsillustrative output Index of Key Success FactorsHypothetical Example Relative Importance for As National Marketer As Regional Marketer National Marketer Regional Marketer Competitor A Competitor B Competitor A Competitor B Effective Distribution 5 4 4 2 4 3 Strong Brand 5 3 5 3 3 4 Innovative Product 2 3 2 1

3 2 Tiered Pricing 2 3 1 1 3 2 4 1 4 1 1 1 1 3 1 1 3 3 High R&D spend 2 1 2 2 1 1 Total 21 18 19 11 18 16 19/21 11/21 18/18 16/18 = 90% = 52% = 100% = 89% Multiple Segment Participation Low Cost Manufacturing Note: The scale does not matter. A five-point maximum per factor is convenient because people are used to making five-point scale evaluations. Source: MAC Group, Core Practice Manual. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 105 - DRAFT COMPETITORS/INDUSTRY STREAMSUPPLEMENTARY ANALYTICS Key success factors & index of key success factorsguidelines Key Success FactorsIdentification Techniques Technique Focus Sources II Environmental Environmental analysis analysis (e.g. (e.g. PEST) PEST) Macro Macro Environment

Environment scanning scanning (Corp. (Corp. Staff) Staff) Econometric Econometric models models Socio-political Socio-political consulting consulting services services IIII Analysis Analysis of of industry industry structure structure (e.g. (e.g. Porter, Porter, Value Value Chain) Chain) Industry Industry Macro Macro A A variety variety of of industry industry structure structure frameworks frameworks III III Industry/business Industry/business experts experts Industry Industry Micro Micro IV IV Analysis Analysis of of competition competition (focus (focus is is limited limited to to the the competitive competitive environment, environment, how how firms firms compete) compete) Industry Industry Micro Micro Advantages Future Future orientation orientation Macro Macro orientation: orientation: analysis analysis goes goes beyond beyond industry-firm industry-firm focus focus Can Can be be linked linked to to threats/ threats/ opportunity opportunity evaluation evaluation Disadvantages More More difficult difficult to to operationalise operationalise into into specific specific industry industry or or firm firm KSFs

KSFs Results Results may may not not lend lend themselves themselves to to incorporate incorporate usage usage in in current current timeframe timeframe (todays (todays KSFs) KSFs) Specific Specific focus focus is is on on industry industry While While excellent excellent source source for for Frameworks industry-wide Frameworks allow allow user user to to industry-wide KSFs KSFs not not so so understand useful understand interrelationships interrelationships useful in in determining determining firmfirmbetween specific between industry industry structural structural specific KSFs KSFs components components Can Can force force more more macro macro level level focus focus (beyond (beyond industry industry boundaries) boundaries) Lack Industry Industry association association executives executives Means Means of of soliciting soliciting Lack of of objectivity objectivity often often leads leads Financial conventional to Financial analysts analysts specialising specialising conventional wisdom wisdom about about to questions questions in in in industry verifying/justifying in industry industry industry and and firms firms verifying/justifying Subjective Outsider Outsider familiar familiar with with firms firms in in Subjective information information often often industry not industry not discovered discovered with with more more Knowledgeable objective, Knowledgeable insiders insiders who who objective, formal

formal and and work analytical work in in industry industry analytical approaches approaches Staff Staff specialities specialities Line Line managers managers Internal Internal consultants consultants External External consultants consultants Narrowness Narrowness of of focus, focus, offers, offers, advantage advantage of of detailed, detailed, specific specific data data Depth Depth of of analysis analysis leads leads to to better better means means of of justification justification Narrowness Narrowness of of focus focus KSF KSF development development limited limited to to competitive competitive arena arena (as (as opposed opposed to to industry industry structure structure approach) approach) Source: Leidecker and Bruno, Identifying and using Critical Success Factors, 1984. Note: CSFs = Critical Success Factors. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 106 - DRAFT COMPETITORS/INDUSTRY STREAMSUPPLEMENTARY ANALYTICS Key success factors & index of key success factorsguidelines (cont.) Key Success Factors Identification Techniques Technique Focus Sources Advantages Disadvantages Dominant Dominant competitor competitor may may set set industry industry KSFs KSFs Understanding Understanding of of No. No. 11 may may assist assist in in co-ordinating co-ordinating firms firms specific specific KSFs KSFs Narrow Narrow focus focus may may preclude preclude seeking seeking alternative alternative explanations explanations of of success

success May May limit limit individual individual firms firms strategic strategic response response and and focus focus V V Analysis Analysis of of dominant dominant firm firm in in the the industry industry Industry Industry Micro Micro VI VI Company Company assessment assessment (comprehensive (comprehensive firmfirmspecific) specific) Micro Micro Internal Thorough Internal staff staff line line Thorough functional functional area area organisations screening organisations (detailed (detailed screening reveals reveals analyses internal/external analyses by by organisation organisation internal/external strengths strengths functionchecklist and functionchecklist approach) approach) and weaknesses weaknesses that that may may assist assist KSF KSF development development VII VII Temporal/intuitive Temporal/intuitive factors factors (firm-specific) (firm-specific) Micro Micro VIII VIII PIMS PIMS results results Industry Industry Micro Micro Articles Articles on on PIMS PIMS Project Project results results Staff Staff specialities specialities Line Line managers managers Internal Internal consultants consultants External External consultants consultants Internal Internal staff

staff Brainstorming Brainstorming CEO/general CEO/general management management observation observation Narrow Narrow focus focus of of analysis analysis precludes precludes inputs inputs of of more more macro macro approaches approaches Check-list Check-list approach approach can can be be very very time time consuming consuming and and become become data data bound bound More Difficulty More subjective subjective and and not not Difficulty in in justifying justifying as as KSF KSF limited ifif only limited to to functional functional analysis analysis only of of short short term term Important approach approach Important may may be be overstated, overstated, Leads ifif in Leads to to identification identification of of in fact fact aa short-lived short-lived important phenomenon important short-run short-run KSFs KSFs that that phenomenon may may go go unnoticed unnoticed in in more more formal formal reviews reviews Empirically Empirically based based Excellent Excellent starting starting point point General General nature nature Applicability Applicability to to your your firm firm or or industry industry Determination Determination of of relative relative importance importance Source: Leidecker and Bruno, Identifying and using Critical Success Factors, 1984. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 107 - COMPETITORS/INDUSTRY STREAMSUPPLEMENTARY ANALYTICS

DRAFT Key success factors and index of key success factors top tips Determining Determining key key success success factors, factors, based based on on aa thorough thoroughunderstanding understandingof ofaa business business or or segment, segment, can can highlight highlightareas areas on on which which clients clientsshould shouldfocus: focus: Potential Potential Insights Insights Hints Hints and and Pitfalls Pitfalls Strengthen Strengthencapabilities capabilities Defend Defendcapabilities capabilities Helps Helps determine determine which which competitors competitors are are well well positioned positionedto tocompete competesuccessfully, successfully, and estimate the relative performance of competitors and estimate the relative performance of competitors Do: Do: Focus Focuson ondrawing drawingup upthe the right rightkey keysuccess successfactors factors Choose Choose aasimple simple scale scale for forweighting weighting criteria criteria Recognise Recognise that thatthe the index indexlargely largely involves involves quantifying quantifying judgements: judgements: Where Wherepossible, possible,try tryto toobtain obtainquantitative quantitativedata dataon oneach eachcompetitors competitorsperformance performanceagainst againsteach eachkey key success successfactor factor Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 108 - COMPETITORS/INDUSTRY STREAMSUPPLEMENTARY ANALYTICS Key success factors and index of key success factorsdata sources, case examples, and related analytics DRAFT Key

Key success success factors: factors: Publicly Publicly-available -available data dataon onbusiness business or orsegment, segment, and andcompetitors, competitors, i.e.: i.e.: Investment Investmentanalysts analystsreports, reports,annual annualreports, reports,databases databases Data Data Sources Sources Gemini Geminianalyses analyses on onbusiness business or orsegment, segment,and andcompetitors competitors Clients data on business or segment, and competitors Clients data on business or segment, and competitors Interviews Interviews with withclient, client, industry industryexperts, experts, and and customers customers The The following following documents documents contain containaachecklist checklistof ofpotential potential approaches approachesfor for identifying identifying key key success success factors: factors: Case Case Examples Examples Attach AttachLeidedner Leidedner&&Bruno Brunomaterial material Also Also attached attachedare are good goodexamples examples of ofkey key success success factor factoranalysis analysis and andreports reports Analytics Analytics required required to to develop develop key key success success factors: factors: Related Related Analytics Analytics Key Keypurchase purchasecriteria criteria Company/competitor Company/competitoranalysis analysis Financial Financialanalysis/ratios analysis/ratiosanalysis analysis PEST and Porter

PEST and Porter Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 109 - Competitors/Industry Stream Analytics Introduction Value Chain Market/Sizing and Share Financial/Ratio Analysis Company/Competitor Analysis SWOT Analysis PEST Analysis Porters Five Forces Growth Share Matrix Key Success Factors Conclusions COMPETITORS/INDUSTRY STREAMCONCLUSIONS The industry/competitors analysis should start to determine some key facts DRAFT How firms are creating value. Who is successful/unsuccessful, and why. What our clients situation is compared with what it believes its situation to be. Whether the business or segments are attractive. Whether any competitors dominate the value chain. Relative power at key stages within the industry. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 111 - DRAFT COMPETITORS/INDUSTRY STREAMCONCLUSIONS But you must keep in mind a few guiding principles Start with the Analytical Problem Solving Process to generate some initial hypotheses. Always constructively question a clients paradigm about the business. Defining the business and segments may take several stages and you may have to refine your definition in the light of further analysis. Do not rely on either the clients or brokers definitions of the business and sub-segments: Unless doing a quick-and-dirty industry analysis. The solution is not in the analysis alonetake time to think about the findings: Solutions come from drawing insights. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 112 - Customer Needs Stream Analytics Introduction Segmentation and Targeting Cluster Analysis Customer Experience Key Purchase Criteria Product Life Cycle Product Substitution

Adoption Cycle Conclusions DRAFT ANALYTICS TO UNDERSTAND A CLIENTS STRATEGIC POSITION Customer Needs Stream: Questions and Analytics Strategic Position What are the (economic) boundaries of the businesses the company is in? How are they changing? Customer Needs Stream Strategic Questions How Howand andwhy whydo docustomers customerspurchase? purchase? What is the trigger? What is the trigger? What Whatdifferent differentneeds-based needs-basedsegments segments exist? exist? What Whatsubstitute substituteproducts productsare arethere? there? What is the underlying customer What is the underlying customerneed? need? What Whattrends trendsare areemerging? emerging? Main Analytics Segmentation Segmentation and and targeting targeting Cluster Cluster analysis analysis Customer Customer experience experience How do companies create value in each of the businesses? How is this changing? How is the client company positioned relative to the competition to create value? How is it changing? What Whatare arethe thekey keypurchase purchasecriteria criteriaby by segment? segment? Are Arepurchase purchasebehaviours behaviourschanging? changing? How? How? Why? Why? Key Key purchase purchase criteria criteria Product Product life life cycle cycle How Howdoes doesour ourclient clientmeet meetthe thekey keypurchase purchase criteria criteriacompared comparedwith withits itscompetitors?

competitors? Product Product substitution substitution Adoption Adoption cycle cycle Core Analytic Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm Supplementary Analytic - 114 - Customer Needs Stream Analytics Introduction Segmentation and Targeting Cluster Analysis Customer Experience Key Purchase Criteria Product Life Cycle Product Substitution Adoption Cycle Conclusions CUSTOMER NEEDS STREAM INTRODUCTION The customer needs stream aims to analyse the three fundamental dimensions of a customer analysis DRAFT Elements of Customer Analysis What What needs? needs? What What purchase purchase criteria? criteria? What What behaviours? behaviours? Key purchase criteria Adoption cycle Product life cycle Product substitution Core Analytics Supplementary Analytics Customer Analysis How How well are we we well are serving serving the the customer? customer? What What differentiators? differentiators? (what (what segments) segments) Segmentation and targeting Cluster analysis

Customer experience The Thepurpose purposeis isboth bothto todetermine determinewhat whatcustomers customersto totarget targetand andhow howto to acquire and retain them. acquire and retain them. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 116 - Customer Needs Stream Analytics Introduction Segmentation and Targeting Cluster Analysis Customer Experience Key Purchase Criteria Product Life Cycle Product Substitution Adoption Cycle Conclusions DRAFT CUSTOMER NEEDS STREAM CORE ANALYTICS Segmentation & targetingintroduction Focus Focus on on Needs-based Needs-based Segmentation Segmentation Overview Overview of of Segmentation Segmentation Process Process of ofdividing dividing markets marketsinto into groups groups of ofpotential potential customers with similar characteristics: customers with similar characteristics: The Theunderlying underlyingassumption assumptionisisthat thatthese thesecustomers customersare arelikely likelyto to exhibit exhibitsimilar similarpurchase purchasebehaviours. behaviours. Segmentation Segmentation aims aims to to answer answer the thefollowing following questions: questions: Analyse Analysewhat whatcustomers

customerskey keyneeds needsare. are. Understand how to serve the different Understand how to serve the differentemerging emergingsegments. segments. What Whatare arethe thecharacteristics characteristicsof ofmy mycustomers? customers? How can they be differentiated (segmented)? How can they be differentiated (segmented)? How Howwell wellare arecompetitors competitorsserving servingeach eachsegment? segment? Which segment should I target and how? Which segment should I target and how? Determine Determinethe theattractiveness attractivenessof ofthese thesesegments. segments. There Thereare are aa number numberof ofways ways to tosegment segmentcustomers: customers: Choice Choiceof ofproducts productsor orbrand. brand. Demographics Demographicse.g. e.g.by byage, age,life lifestage, stage,social socialclass. class. Psychographicsusing attitudes and behaviours. Psychographicsusing attitudes and behaviours. Needs Needs(see (seeopposite). opposite). Channels. Channels. Financial Financialassets assets(good (goodfor forpersonal personalfinance financemarket). market). Etc. Etc. Specific Specifictype type of of segmentation, segmentation,which whichsplits splits current current and/or prospective customers into homogeneous and/or prospective customers into homogeneous groups groupsbased based on on product productand/or and/or service service needs. needs.

Thus, Thus, needs-based needs-based segmentation segmentation is is aa means meansto: to: Gemini Gemini often oftenuses usesan an needs-based needs-basedapproach approachas asititis is linked heavily with Geminis Building Market linked heavily with Geminis Building Market Focused Focused Organisation Organisation (BMFO) (BMFO)methodology: methodology: See Seestrategy strategykbase kbaseon onGemini GeminiCompass Compassfor fordetailed detailedmaterial. material. AAneeds-based needs-based approach approach is is used used to to ensure ensure aa customer customer is is more more likely likely to to respond respondto toaa proposition: proposition: Specific Specificneeds needsare areaddressed addressedand andtargeted. targeted. Segmentation Segmentation can canbe bedeveloped developedby by aa combination combination of a quantitative or qualitative approach: of a quantitative or qualitative approach: Cluster Clusteranalysis analysisinvolves involves aavery veryquantitative quantitativeapproach. approach. Needs based/BMFO is more qualitative. Needs based/BMFO is more qualitative. Guidance Guidanceshould shouldbe besought soughtas asto towhat whattype typeof ofsegmentation segmentationto touse use Gemini contacts Shirley Lo, Julia Beck. Gemini contacts Shirley Lo, Julia Beck. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 118 - DRAFT CUSTOMER NEEDS STREAM CORE ANALYTICS Segmentation & targetingintroduction (cont.)

Why Why We We Use Use ItIt Strengths Strengths & & Limitations Limitations Isolates Isolates sections sections of of market marketfor forwhich whichstrategy strategy needs to be uniquely defined: needs to be uniquely defined: Strengths: Strengths: Focused Focused approach approachwhich which helps helps increase increase revenue revenue and margin. and margin. Foundation Foundationon onwhich whichall allother othermarketing marketing actions actions can can be be based. based. Provides Providesgreater greatercustomer-focus: customer-focus: Finds Findsniche nicheopportunities. opportunities. Identifies customers Identifies customersmore morelikely likelyto toundertake undertakeaagiven given attitude. attitude. Evaluates Evaluates segments segments and and chooses choosesone one or ormore more for fortarget targetactivity. activity. Identifies Identifieswhich which customer customer groups groups the thecompany company should focus. should focus. Identifies Identifiesappropriate appropriate products, products, services, services, and and marketing for different segments. marketing for different segments. Allows Allowsthe theorganisation organisationto togain gainaaclear clearpicture pictureof ofeach eachsegment segment and andits itsservice

serviceneeds. needs. Limitations: Limitations: Requires Requires aamajor majorcorporate corporatecommitment. commitment. Can become too reliant on statistically Can become too reliant on statisticallysignificant significant segments segments at atthe the expense expense of of industry industry experience experience and and business sense. business sense. Can Can cost costmore more than than aamass massmarketing marketing approach. approach. For needs-based segmentation, it is unlikely For needs-based segmentation, it is unlikely that that customer customer needs needsdata data is is already already available: available: Time Timeconsuming consumingto tocollect collectinformation informationrequired. required. AAconsiderable considerableamount amountof of time timeis is required requiredto tocollate collate data data (minimum (minimum22 weeks): weeks): Careful Carefulconsideration considerationof ofuse useof ofanalytic analyticmust mustbe begiven. given. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 119 - DRAFT CUSTOMER NEEDS STREAM CORE ANALYTICS Segmentation & targetinghow to do it Conducting segmentation requires the following steps: Define Scope Establish research objectives Review segmentation viability/segment formation criteria: Time available Level of detail required Seek guidance from experts or books Contact Shirley Lo or Julia Beck Select Segmentation Bases Choose type of market segmentation: Generate hypothesis about market Determine, criteria/variables for segmentation

Gather Data Analyse Data Design and choose data Identify attributes gathering approach, captured during e.g.: customer interviews Identify information required Test approach with joint team Plan/conduct data gathering: Phone surveys Day in life of studies Workshops Focus/groups Sampling Use statistical techniques to groups respondents, including: Cluster analysis Group the attributes in a manageable number of segments: Profile each segment Can segment be ranked? Can segment be reached? Will segment respond? Target Evaluate the attractiveness of each segment (see example overleaf): Size and growth (on the basis of your sampling procedure assumptions, infer segment size) Key Purchase Criteria vs. your value proposition Profitability vs. efforts needed to serve segment Accessibility Select the target segment for your activities: Validate segments Conduct gap analysis Assess capabilities/ability to serve potential segments: Existing v. required Use checklist of segmentation criteria (see below) CUSTOMER DATABASE Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 120 - DRAFT CUSTOMER NEEDS STREAM CORE ANALYTICS Segmentation & targetingselection criteria Selection Selection Criteria Criteria 1. 1. Targetability: Targetability: Can Can you youeasily easilyreach reach your yourcustomers? customers? 2. 2. Measurability: Measurability: Can Canyou youquantify quantifythe thesegment segmentby bysize sizeand andproduct productusage? usage? Can you rank the buying factors that are meaningful Can you rank the buying factors that are meaningfulto toyour yourcustomers? customers? 3. 3. Accessibility: Accessibility: How Howefficient

efficientare arethe thechannels channelsat atserving servingeach eachsegment? segment? 4. 4. Sustainability: Sustainability: How Howmany manysegments segmentsare arereasonable? reasonable? Are the segments large Are the segments largeenough enoughto towarrant warrantthe theresources resourcesand andeffort effortnecessary necessaryfor foraatargeted targetedmarketing marketing effort? effort? IsIscluster clustermembership membershipstable? stable? IsIsthe thesolution solutionstable? stable? 5. 5. Profitability: Profitability: IsIsthe thesegment segmentpotentially potentiallyprofitable profitableenough enoughto tomake makethe theeffort effortworthwhile? worthwhile? 6. 6. Compatibility Compatibilitywith withcompetition: competition: How Howinterested interestedininthe thesegment segmentare areyour yourmajor majorcompetitors? competitors? Are they actively pursuing it, or are they showing Are they actively pursuing it, or are they showingonly onlyaamild mildinterest? interest? 7. 7. Effectiveness: Effectiveness: Does Doesyour yoursales salesforce forcehave havethe theskills skillsand andresources resourcesneeded neededto toserve servethe thesegment segmenteffectively effectivelyfor forthe thelong long haul? haul? Do Doclusters clustersoffer offeractionable actionableopportunities? opportunities? 8. 8. Defendability:

Defendability: Can Canyour yourcompany companydefend defendthis thissegment segmentagainst againstattack attackby byaamajor majorcompetitor? competitor? Source: Adapted from Norton Paley, Cut Out For Success, Sales and Marketing Management, Vol. 146, No. 11, 1994. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 121 - DRAFT CUSTOMER NEEDS STREAM CORE ANALYTICS Segmentation & targetingillustrative output Example Segment Profile: Low priorities Needs Availability and reliability dominate all other needs Reliability deliveries Mixed pallets not required Few display pallets Promotions are important for some Understanding of needs is important Most will have EDI and scanning Cross-docking and back-hauling unlikely in 3-5 years time Many will require non-standard pack sizes Characteristics Handling of returns and credits Secondary packaging specification Multi-functional contact Chiefly supermarket chains Few delivery points Warehouse deliveries Key Performance Gaps (Competitor Performance vs. Lever Performance) Delivery reliability from Lever today: +/- 2.5 hours from best in class today: +/- 2.5 hour future need: +/- 1 hour Product availability from Lever today: 97% from best in class today: 99% future need: 100% Understanding of needs Promotion type and exclusivity some require twice as many exclusive promotions Delivery lead time from Lever today: 3.5 days from best in class today: 3.5 days future need: 1 day Importance and Performance Ratings 1,000 900 800 700 600 500 400 300 200 Handling of Returns / Credits Spec. of Secondary Packaging Efficiency of Off-Loading Multi-Functional Contact Delivery Configuration Efficient Invoicing Good Arrival Condition Order Taking Efficiency Communications Frequency Complaints Response Low DPC Information Provision Promotion Lead Time Regular Range Rationalisation Content Accuracy

EDI Capability Partnership Approach Promotion Frequency Innovation Lead Time Delivery Lead Time Promotion Type Promotion Exclusivity Product Availability Delivery Reliability 0 Needs Understanding 100 Need Importance Lever Performance Competitor Performance Note: Figures are average for each segment. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 122 - DRAFT CUSTOMER NEEDS STREAM CORE ANALYTICS Segmentation & targetingtop tips Potential Potential Insights Insights Hints Hints and and Pitfalls Pitfalls May Mayreveal revealnew newopportunities opportunities Segmentation Segmentationis isaacritical criticalaspect aspectof ofcustomer customeranalysis analysis Analytic helps determine: Analytic helps determine: What Whatthe thecharacteristics characteristicsof ofyour yourcustomers customersare are How Howthese thesecustomers customerscan canbe bedifferentiated differentiatedbased basedon ontheir theircharacteristics characteristics Where Whereniche nicheopportunities opportunitieslie: lie: Existing Existingunsatisfied unsatisfiedneeds needs Opportunities Opportunitiesto tocreate createnew newneeds needs Do: Do: Consider Considerneeds needsalong alongthe thewhole wholevalue valuechain chain Ensure segments are targetableensure Ensure segments are targetableensuresufficient sufficientdemographic demographicdata data

Spend sufficient time hypothesising needs, listing other Spend sufficient time hypothesising needs, listing otherinformation informationrequired, required,and andwriting writing and andtesting testingsurvey survey Consider Considerconducting conductingaapreliminary preliminarysurveymay surveymaybe beuseful usefulto toidentify identifyaafull fullset setof ofcustomer customer needs needs Consider Considerusing usingaamarket marketresearch researchagency agencyto tocarry carryout outsurvey, survey,tabulate tabulateresults, results,and and perform performcluster clusteranalysis analysis Make Makesure sureyou youvalidate validateyour yoursegmentation segmentationcriteriatest criteriatestwith withpeople peoplewho whowill willuse useitit Be specific about how you are going to reach and serve each segment Be specific about how you are going to reach and serve each segment Dont: Dont: Collect Collecttoo toolittle littlerelevant relevantinformation information Use Usean aninsufficient insufficientsample samplesize size Use non-uniform information Use non-uniform informationcollected collectedacross acrossall allproduct productcategories categories Rely Relyon oninformation informationsystems systemsincapable incapableof ofcross crosscommunication communication Try Tryto todo dothis thisin inaalimited limitedtimeframe timeframe Be side-tracked by

Be side-tracked byrecent recentups upsor ordowns downsin inthe theclients clientsservice servicelevel, level,and andhow howthis thisimpacts impacts customer perception customer perception Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 123 - DRAFT CUSTOMER NEEDS STREAM CORE ANALYTICS Segmentation & targetingdata sources, case examples, related analytics Primary Primary sources: sources: Data Data Sources Sources Focus Focusgroups groups Personal Personalinterviews interviews Telephone Telephoneinterviews interviews Secondary Secondary sources: sources: Publicly Publiclyavailable availabledata data Market Marketresearch research Consumer Consumersurveys surveys Case Case Example Example Related Related Analysis Analysis The The following following documents documentscontain containgood good case case examples examplesof ofneeds-based needs-based segmentation segmentation and output: and output: Lever: Lever: Understanding UnderstandingCustomer CustomerService ServiceRequirements; Requirements;Part Part22Customer CustomerSegmentation Segmentationby by Needs Needs British BritishSteel, Steel,London LondonServer Server Cluster Clusteranalysis analysis Segment Segmentattractiveness attractiveness BMFO BMFO methodology methodology (see (see Strategy Strategy Kbase Kbase on on Gemini Gemini Compass) Compass) Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 124 - Customer Needs Stream Analytics

Introduction Segmentation and Targeting Cluster Analysis Customer Experience Key Purchase Criteria Product Life Cycle Product Substitution Adoption Cycle Conclusions DRAFT CUSTOMER NEEDS STREAM CORE ANALYTICS Cluster analysisintroduction Why Why We We Use Use ItIt What What ItIt Is Is Cluster Clusteranalysis analysisis ispart partof ofaastatistical statistical process which aims to generate process which aims to generatesegments: segments: AAcluster cluster(or (orsegment) segment)consists consistsininthe thegrouping groupingof of customers presenting similar features (I.e. customers presenting similar features (I.e.needs, needs, buying buyingcriteria, criteria,etc.) etc.) AAcluster results cluster resultsfrom fromthe theextraction extractionwithin withinaawide wide statistical statisticalpopulation populationof ofsimilar similarindividuals individuals The Thecluster clusteranalysis analysisprocess processis isaadata data crunch process: crunch process: 1. Identify key dimensions which explain variance in data set Apply hypotheses Apply factor analysis 2. Cluster

respondents according to how they scored against the key dimensions Develop segment profiles from statistical clusters Cluster Analysis Allows Allowsyou youto tointerpret interpretany anymarket marketas asthe thesum sum of several clusters: of several clusters: To Tobuild buildaastrong strongfact-based fact-basedsegmentation: segmentation: Identifying Identifyingof ofsegments segments Characterising Characterisingof ofsegments segments Relatively Relativelysizing sizingclusters clusters Note: Note: We Wegenerally generallyuse usethe theoutput outputof ofcluster clusteranalysisthe analysisthedata data mining miningand andcrunching crunchingaspect aspectbeing beingfrequently frequentlyoutsourced outsourcedto to service serviceproviders providers Strengths Strengths & & Limitations Limitations Strengths Strengths Indispensable Indispensableto toachieve achieverigorous rigoroussegmentation segmentation Limitations Limitations Cumbersome Cumbersomeprocess processwhen whencriteria criteriafor forsegmentation segmentationare are complex complex Each Eachcluster clusterpresents presentsaaspecific specificprofile profile Can Canbe beused usedto tohelp helpdevelop developneeds-based needs-based segments segments Gemini Consulting Limited Proprietary and Confidential

StratL21Oct98Rpmmdm - 126 - DRAFT CUSTOMER NEEDS STREAM CORE ANALYTICS Cluster analysishow to do it Iterative IterativeLoop Loop Why are Why areclusters clusters emerging? emerging? Can we act on these Can we act on these clusters? clusters? 1. 1. Analyse Analyse potential potentialcriteria criteria Conduct Conductupfront upfrontfactor factor analysis analysisto todetermine determine factors factors Apply Applyindustry industryhypotheses hypotheses 2. 2. Determine Determine criteria criteria for for clustering clustering Set Setyour yourtargets: targets: What Whatdo doyou youneed needtoto understand understandfrom fromyour your population population What Whatdimensions dimensionscharacterise/ characterise/ influence influenceyour yourmarket: market: Focus Focuson onexplanatory explanatory dimensions dimensions Validate Validateyour yourtarget targetcriteria: criteria: Workshops Workshops Focus Focusgroups groups Analysis Analysisof ofcustomer customersurveys surveys Clusters Clustersare arechosen chosenby by looking at a number looking at a numberof of different differentcriteria criteriato tosee seewhich

which result resultin inthe themost mostdistinct distinct segments segments 4. 4. Flesh Fleshout outsegment segment profiles profiles 3. 3. Choose Chooseclusters clusters Using Usingeither eitheraaspreadsheet spreadsheet or orspecific specificsoftware, software,clusters clusters are areextracted extractedfrom fromaa customer customerdatabase database Group Groupindividuals individualsaccording according to totheir theirscores scoresin inthe the dimensions dimensionspreviously previously identified: identified: Anyone Anyonewithin withinaacluster clusterisis nearer nearertotothe themid-point mid-pointof ofthat that cluster clusterthan thanany anyother other Run Runcluster clusterbreaks breaksagainst against all allstatements statements Examine Examinethe thehard hard demographic demographicdata dataavailable available for each cluster for each cluster Develop Developpen-portraits pen-portraitsfor for each segment each segment The Thenumber numberof ofclusters clustersis is ultimately a matter ultimately a matterof of judgement: judgement: Can Caninintheory theorybe belimitless limitless See Seesegmentation segmentation

Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 127 - DRAFT CUSTOMER NEEDS STREAM CORE ANALYTICS Cluster analysistop tips Potential Potential Insights Insights Hints Hints and and Pitfalls Pitfalls Data Data Sources Sources Critical Criticalstep stepin inthe thesegmentation segmentationprocess process Allows client to determine parameters Allows client to determine parameterswhich whichdifferentiate differentiatetheir theirmarket market Enables understanding of how different parts of the market operate Enables understanding of how different parts of the market operate Do: Do: Make Makesure surethat thatyour yourexample exampleis isstatistically statisticallysignificant significant Try multiple criteria to see which form the best Try multiple criteria to see which form the bestcluster cluster Try Tryto tooutsource outsourcewhere wherepossibleCap possibleCapGemini Geminihave haveaagroup groupthat thatperform performthis thisfunction function Dont: Dont: Rely Relytotally totallyon onthe theanalysis analysis use usejudgement judgementand andknowledge knowledgeto tochoose choosethe thebest bestcluster cluster Customer Customersurveys surveys Workshops Workshops Interviews Interviews Clients

Clientscustomer customerdatabase database The Thefollowing followingdocuments documentscontain containgood goodexamples examplesof ofcluster clusteranalysis analysisand andoutput output Segmentation Segmentation Multi-variant Multi-variantstatistical statisticalanalysis, analysis,e.g. e.g.Conjoint Conjointanalysis analysis(see (seeStrategy StrategyKbase Kbaseon onGemini Gemini Compass for detailed material) Compass for detailed material) Key Keypurchase purchasecriteria criteria Case Case Examples Examples Related Related Analytics Analytics Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 128 - Customer Needs Stream Analytics Introduction Segmentation and Targeting Cluster Analysis Customer Experience Key Purchase Criteria Product Life Cycle Product Substitution Adoption Cycle Conclusions DRAFT CUSTOMER NEEDS STREAM CORE ANALYTICS Customer experienceintroduction Why Why We We Use Use ItIt What What ItIt Is Is Illustrates Illustrateskey keyareas areasof ofcustomers customersinteractions interactionswith with

aabusiness: business: Usually Usuallyshown shownas asaasuccession successionof ofinteraction interactionwith with aacompany company Should Shouldaccount accountfor forwhat whatthe thecustomer customergoes goes through throughfrom fromthe thetime timethey theyfirst firstbecome becomeaware awareof ofaa product productto tothe thepoint pointthey theystop stopusing usingitit Can Canbe begeneric genericfor foran anindustry industryor orspecific specificfor foraa given company given company Provides Providesaastarting startingpoint pointto toidentify identifyareas areasof of potential potentialdifferentiation differentiation Answers Answersaaseries seriesof ofquestions questionsas asto towhat, what,where, where, when, when,how howand andwhy whycustomers customersbuy, buy,e.g.: e.g.: How Howdo doconsumers consumersbecome becomeaware awareof oftheir theirneeds? needs? How Howdo doconsumers consumersorder orderand andpurchase? purchase? How is your product repaired or How is your product repaired orserviced? serviced? Understand Understandwhat whatevents eventsaffect affectthe thecustomers customersrelationship relationship to decide what levers the client should

to decide what levers the client shouldmanage managestrategically strategically and andoperationally operationallyto toretain retainthe thecustomer customer Highlight Highlightwhat whatprocesses processesare arekey keyto toefficiently efficientlyserve serveand and retain retainthe thecustomer: customer: Both Bothpractical practical(eg. (eg.switchboard) switchboard)and andtechnical technical(eg. (eg.R&D) R&D) Help Helpfocus focuscreativity creativityon onareas areaswhere whereopportunities opportunitiesto tocreate create aacompetitive competitiveadvantage advantageappear appear Strengths Strengths & & Limitations Limitations Highlights Highlightswhat whatcriteria criteriaare areimportant importantto tocustomers customers in purchase and discontinuation decisions in purchase and discontinuation decisions AAvariant variantof ofthe thevalue valuechain chainconcept: concept: Plots Plotscustomer customerinteraction interactionagainst againstitit Strengths: Strengths: Interprets Interpretsthe theindustry/company industry/companyvalue valuechain chainfrom fromcustomers customers perspective perspective Helps Helpsput putthem theminintheir theircustomers customersshares: shares: Can help make understanding very tangible Can help make understanding very tangiblefor forclients: clients: Puts them in their customers shoes. Puts them in their customers shoes.

Limitations: Limitations: Lengthy Lengthyprocess: process: Requires Requireswide wideranging rangingcustomer customersurveys surveys Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 130 - DRAFT CUSTOMER NEEDS STREAM CORE ANALYTICS Customer experiencehow to do it 1. Get a rough understanding of how and why consumers are buying: Analyse consumer surveys. Talk to experts in the client company. For each key dimension of the customer experience, capture: What takes place, where, with whom, and how. What influences the customer and why. What customers are satisfied/dissatisfied with and why. Validate your understanding with customers: Conduct customer focus groups and customer interviews. 2. Map the customers experience to the clients processes. 3. Identify associated activitiesto deliver the customers experience. 4. Use focus groups to analyse where areas exist for potential improvement. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 131 - DRAFT CUSTOMER NEEDS STREAM CORE ANALYTICS Customer experienceillustrative output An Illustration of Customer Experience in the Telcos The Customer Experience Delivering the Customer Experience Activities to Deliver the Customer Experience Brand awareness Branding Branding & Positioning Positioning Product & service availability Product Product Development Development Ease of buying Sales Sales Ease of connection Credit Credit Checking Set-up Set-up & & Activation Activation The First Experience Usage quality Delivery Delivery Usage Usage Quality of service Customer Customer Services Services Ease of leaving Billing Billing & & Collection Collection

Service Service Termination Company/Industry Value Chain Source: London Shop Training Module: Production Market/Industry Analyses and Using Strategic Frameworks, 27/2/98, p. 14. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 132 - DRAFT CUSTOMER NEEDS STREAM CORE ANALYTICS Customer experiencetop tips Potential Potential Insights Insights Highlights Highlightstypical typicalsource sourceof ofcustomer customersatisfaction satisfactionand andretention retentionby by appreciating the context within which each step of the consumption appreciating the context within which each step of the consumptionchain chain unfolds unfolds Suggests Suggestslevers leversfor fordifferentiation differentiation Provides Providesaabasis basisfor forexploring exploringmany manynon-traditional non-traditionalways waysto tocreate createvalue value Do: Do: Perform Performthe theexercise exercisefor foreach eachimportant importantcustomer customersegment segment Hints Hints and and Pitfalls Pitfalls Compare Comparecustomers customersactual actualexperience experiencewith withyour yourclients clientsperception perceptionof ofwhat what that experience is that experience is Link Linkto tofunctions functionsand andprocesses processes Use Usepersonal personalexperience experienceaaaastarting startingpoint pointto tounderstand understandthe theprocess

process Dont: Dont: Over Oversimplify simplifythe thecustomer customerexperience: experience: Its complexity may suggest Its complexity may suggestlevers leversfor fordifferentiation differentiation Develop Developyour yourpoint pointof ofview viewfrom fromaatoo toolimited limitedset setof ofspecific specificexperiences experiences Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 133 - DRAFT CUSTOMER NEEDS STREAM CORE ANALYTICS Customer experiencedata sources, case examples and related analytics Data Data Sources Sources Personal Personal experience experience Customer Customersurvey survey Interviews: Interviews: Customer Customer Experts Experts Case Case Examples Examples Focus Focus groups groups Market Market research research Experience Experience on onother other projects projects The Thefollowing following documents documentscontain contain good goodcase case examples examples of of customer customerexperience: experience: Related Related Analytics Analytics Most Most useful useful when when conducting conductingaa customer customeranalysis analysis

Can Can be be complemented complemented by by the thefollowing following analytics: analytics: Needs Needsbased basedsegmentation segmentation Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 134 - Customer Needs Stream Analytics Introduction Segmentation and Targeting Cluster Analysis Customer Experience Key Purchase Criteria Product Life Cycle Product Substitution Adoption Cycle Conclusions DRAFT CUSTOMER NEEDS STREAM CORE ANALYTICS Key purchase criteriaintroduction Why Why We We Use Use ItIt What What ItIt Is Is Key Keypurchase purchasecriteria: criteria: Criteria that Criteria thatare aremost mostimportant importantto tocustomers customers in the buying process: in the buying process: Aim Aimisisto tounderstand understandthe themost mostimportant important drivers driversof ofpurchase purchasebehaviour behaviour Usually Usuallylearned learnedvia viastructured structuredcustomer customer interviews interviews AAtechnique techniquefor forscoring scoringcompetitors competitorsagainst against customers key purchase customers key purchasecriteria: criteria: Outlined Outlinedby byRichard RichardKoch Kochin inhis hisGuide Guideto

to a Strategy Strategya Koch Kochdescribes describesaafour-step four-stepprocess processto to evaluate competitors against evaluate competitors againstthe thekey key purchase purchasecriteria criteria Typically there Typically thereare arethree threeelements: elements: 1. 1. Assessment Assessmentof ofcustomers customerskey keypurchase purchase criteria criteria 2. 2. Rating Ratingof ofclients clientsagainst againstthose thosecriteria criteria 3. 3. Rating Ratingof ofcompetitors competitorsagainst againstthose thosecriteria criteria Understand Understandwhat whatdrives drivescustomers customerspurchase purchase decisions decisions Identify Identifyopportunities opportunitiesfrom fromunmet unmetneeds needs Determine how client is rated against Determine how client is rated againstcompetitors competitors Strengths Strengths & & Limitations Limitations Strengths: Strengths: Provides Providesaaquantitative quantitativeassessment assessmentof ofhow how competitors perform against criteria and competitors perform against criteria andwith withrespect respect to each other to each other Limitations: Limitations: Criteria Criteriaand andanalysis analysisare areonly onlyas asgood goodas asthe thethinking thinking and business judgement that

went into them! and business judgement that went into them! a. FT Pitman Publishing, 1995 Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 136 - DRAFT CUSTOMER NEEDS STREAM CORE ANALYTICS Key purchase criteriahow to apply it Key Key Purchase Purchase Criteria Criteria Set-up Set-up aa solid solid questionnaire questionnaire based basedon onyour yourtarget targetcustomer customer purchase criteria: purchase criteria: Brainstorm Brainstormthe the potential potentialcriteria criteria with with industry/market industry/marketexperts experts Test Test them them with with focus focusgroups groups Select Select target targetcustomers customers and and conduct conductinterviews: interviews: Establish Establish aaclear clearlist list of of selection selection criteria criteria based based on on target target customer customer profiles profiles (see (seesegmentation) segmentation) Ask Ask interviewees interviewees to to rank rank their theirpurchase purchasecriteria criteria on on aa scale scale from from11 (unimportant) to 5 (essential) (unimportant) to 5 (essential) Record Record answers answers in inaa spreadsheet spreadsheet and anddisplay displaythe the average average result result graphically (see illustrative output) graphically (see illustrative output) Ask Askcustomers customersto toscore score client clienton oneach eachof ofthe thepurchase purchase criteria, criteria, on on aa 11to to 55 scale. scale. Then Thenask askcustomers customersto to score score clients clients competitors competitors on onaa similar

similar scale on each of the criteria: scale on each of the criteria: Overlay Overlayresults results on on the thesame same graph graph Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 137 - StratL21Oct98Rpmmdm Gemini Consulting Limited Proprietary and Confidential Spec. of Secondary Packaging Efficiency of Off-Loading Multi-Functional Contact Delivery Configuration Good Arrival Condition 900 Efficient Invoicing Order Taking Efficiency 1,000 Handling of Returns / Credits Source: Internal Interviews. N= 33. Communications Frequency Complaints Response Low DPC Information Provision Promotion Lead Time Regular Range Rationalisation Content Accuracy EDI Capability Partnership Approach Promotion Frequency Innovation Lead Time Delivery Lead Time Promotion Exclusivity Promotion Type Needs Understanding Product Availability Delivery Reliability CUSTOMER NEEDS STREAM CORE ANALYTICS DRAFT Key purchase criteriaillustrative output Importance and Performance Ratings Need Importance Rating Lever Performance Competitor Performance 800 700 600 500 400 300 200 100 0 - 138 - DRAFT CUSTOMER NEEDS STREAM CORE ANALYTICS Key purchase criteriatop tips Potential Potential Insights Insights Highlights

Highlightspotential potentiallevers leversfor forpursuing pursuingcompetitive competitiveadvantage advantage Show Showhow howwell wellthe theclient clientcompany companyis ismeeting meetingthe thesegment segmentpurchasing purchasingcriteria criteria Hints Hints and and Pitfalls Pitfalls Do: Do: Try Tryto tounderstand understandpeoples peoplessubconcious subconciousneeds needs(one-third (one-thirdare arerational, rational,two-thirds two-thirdsare areemotional) emotional) Understand Understandthe thedrivers driversof ofmarket marketshare share Make Makesure surethat thatyour yoursample sampleisisstatistically statisticallysignificant significant(size, (size,characteristics, characteristics,etc.) etc.) Dont: Dont: Confuse Confuseprice priceas asbeing beingaakey keyfactor factor--identify identifyvalue valuefor formoney moneybenefits benefits Take information at face value in a commodity market Take information at face value in a commodity market -question questionand andchallenge challengeitit Data Data Sources Sources Key KeyPurchase PurchaseCriteria: Criteria: Customers Customerssurveys surveys(questionnaire) (questionnaire) Case Case Examples Examples The Thefollowing followingdocuments documentscontain containgood goodexamples examplesof ofoutput outputof ofbusiness businessdefinition definitionanalysis: analysis: Lever: Lever: London LondonProject ProjectArchive

Archive T&N: T&N: London LondonProject ProjectArchive Archive Cellnet: London Cellnet: LondonProject ProjectArchive Archive Also refer to Richard Kochs Also refer to Richard Kochsbook bookGuide Guideto toStrategy Strategy Related Related Analytics Analytics Customer Customerexperience experience Price Priceelasticity elasticity Adoption Adoptioncycle cycle Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 139 - Customer Needs Stream Analytics Introduction Segmentation and Targeting Cluster Analysis Customer Experience Key Purchase Criteria Product Life Cycle Product Substitution Adoption Cycle Conclusions DRAFT CUSTOMER NEEDS STREAM SUPPLEMENTARY ANALYTICS Product life cycleintroduction Why Why We We Use Use ItIt What What ItIt Is Is Based Basedon onthe theage ageof ofaaproduct productcategory, category, predicts how sales will predicts how sales willdevelop develop Distinguishes Distinguishesfive fivestages stagesof ofdevelopment: development: Introduction Introduction Growth Growth Maturity Maturity Saturation Saturation Decline/termination

Decline/termination Predict Predictsales salesgrowth, growth,and andassociated associatedcustomer customerand and competitor competitorbehaviours behaviours Prescribe Prescribeappropriate appropriatemarketing marketingstrategy strategy Assess strengths/weaknesses of product Assess strengths/weaknesses of productportfolio portfolio Phases of sales growth Phases of sales decline Length Lengthof oftime timein ineach eachperiod periodvaries varies tremendously: tremendously: Some Someproducts productshave havevery veryshort shortcycles, cycles,others otherstake take decades decadesor oreven evencenturies centuriesto togo gothrough throughthe thecycle cycle Growth Growthis isstill stillpossible possiblein inmature maturecategories, categories, but typically will require greater but typically will require greaterinvestment investmentor or greater greatercreativity creativitythan thanin inless lessmature mature categories categories Strengths Strengths & & Limitations Limitations Strengths: Strengths: Limitations: Limitations: Most Mostuseful usefulas asone oneof ofseveral severalsources sourcesof ofevidence, evidence,e.g. e.g.with with conjoint analysis

conjoint analysis Any Anyprediction predictionisistricky tricky Companies Companiescan canaffect affectthe theshape shapeof ofthe thegrowth growthcurve curvethrough through product innovation and repositioning product innovation and repositioning Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 141 - DRAFT CUSTOMER NEEDS STREAM SUPPLEMENTARY ANALYTICS Product life cyclehow to use it Establish Establish ifif the the concept concept is is applicable applicable Data Datarequired: required: Sales Salesfigures/timeframe: figures/timeframe: Either Eitheractual actualpast/current past/currentsales sales Or Orforecasted forecastedfigures figures Use Usestrategic/judgmental strategic/judgmentalanalysis: analysis: Use Usethe thetheoretical theoreticalcurve curveto toevaluate evaluate where wherethe thecategory categorystands stands Consider Consideruse useof ofconjoint conjointanalysis analysis ItItis isimportant importantto topredict predictthe the highest level that highest level thatsales saleswill willreach, reach, e.g. e.g.for foraahousehold householdappliance appliancethe the simplified simplifiedformula formulamight mightbe: be: Annual AnnualSales Sales== Use Usestatistical/graphical statistical/graphicalanalysis: analysis: (Number (Numberof

ofnew newhouseholds) households)xx (percentage (percentagewho whowill willbuy) buy)++ (Number (Numberof ofexisting existingowners) owners)xx (percentage who replace (percentage who replaceeach eachyear) year) Plot Plotpast pastcategory categorysales salesdata dataininaa spreadsheet, spreadsheet, ininsuch suchaaway waythat thataa long longterm termpattern patternisiseasily easilyshown shown Predict Predict the the timing timing of of future future developments developments Predict Predict how how sales sales will will develop develop Look Lookto tothe thecategorys categoryspast past behaviour and behaviour andcompare comparewith with similar similarproducts products Look Lookout outfor: for: Technology Technologyshifts shifts Lead markets Lead markets Substitute Substituteproducts products Telecoms/e-commerce Telecoms/e-commerce The Theuptake uptakepercentage percentagemust mustbe be established using: established using: Customer Customersurveys surveys Industry forecasting Industry forecastingmodels modelswhere where available available Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 142 - DRAFT CUSTOMER NEEDS STREAM SUPPLEMENTARY ANALYTICS Product life cycleillustrative output Household Durables in Early 1970s Introduction

Growth Maturity Saturation Decline/ Termination Refrigerators Automatic Washers Freezers Ranges & Ovens Room A/C Saturation/Sales B&W TV Adoption Colour TV Dishwasher Introduction Compactor Wringer Innovators 2.5% Early Adopters 13.5% Early Majority 34% Late Majority 34% Laggards 16% Time Source: Mac Group Core Practice Manual. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 143 - DRAFT CUSTOMER NEEDS STREAMSUPPLEMENTARY ANALYTICS Product life cyclepotential insight Typical Insight Provided by Product Life Cycle Analysis Introduction Introduction Buyers Buyers and and Buyer Buyer Behaviour Behaviour Products Products and and Product Product Change Change Growth Growth Maturity Maturity Decline Decline Widening Widening buyer buyer groups groups uneven uneven quality quality Poor Poor quality quality Product Product design design and and development development key key Many Many different different product product variations; variations; no no standards standards Frequent Frequent design design changes

changes Basic Basic product product designs designs Products Products have have technical technical and and performance performance differentiation differentiation Reliability key for complex products Reliability key for complex products Competitive Competitive product product improvements improvements Good Good quality quality Superior Superior quality quality Less Less product product differentiation differentiation Standardisation Standardisation Less rapid product Less rapid product changesmore changesmore minor minor annual annual model model changes changes Trade-ins Trade-ins become become significant significant Little Little product product differentiation differentiation Spotty Spotty product product quality quality Marketing Marketing Very Very high high advertising/sales advertising/sales (a/s) (a/s) Creaming Creaming prices prices strategy strategy High High marketing marketing costs costs High High advertising, advertising, but but lower lower percent percent of of sales sales than than introductory introductory Most Most promotion promotion of of ethical ethical drugs drugs Advertising Advertising and and distribution distribution key key for for nonnontechnical technical products products Low Low a/s a/s and and other other marketing marketing

Manufacturing Manufacturing and and Distribution Distribution Some Some over over capacity capacity Optimum Optimum capacity capacity Increasing Increasing stability stability of of manufacturing manufacturing process process Lower Lower labour labour skills skills Long Long production production runs runs with with stable stable techniques techniques Distribution Distribution channels channels pare pare down down their their lines lines to to improve improve their their margins margins High High physical physical distribution distribution costs costs due due to to broad broad lines lines Mass Mass channels channels High-income High-income purchaser purchaser Buyer Buyer inertia inertia Buyers Buyers must must be be convinced convinced to to try try the the product product Over Over capacity capacity Short Short production production runs runs High High skilled-labour skilled-labour content content High production costs High production costs Specialised Specialised channels channels Under Under capacity capacity Shift Shift toward toward mass mass production production Scramble Scramble for for distribution distribution Mass channels Mass channels Mass Mass market

market Saturation Saturation Repeat Repeat buying buying Choosing Choosing among among brands brands is is the the rule rule Market Market segmentation segmentation Efforts Efforts to to extend extend life life cycle cycle Broaden Broaden line line Service Service and and deals deals more more prevalent prevalent Packaging Packaging important important Advertising Advertising competition competition Lower Lower a/s a/s Customers Customers are are sophisticated sophisticated buyers buyers of of the the product product Substantial Substantial over over capacity capacity Mass Mass production production Speciality Speciality channels channels Source: M.E. Porter, Competitive Strategy, 1980, pp. 159161. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 144 - DRAFT CUSTOMER NEEDS STREAMSUPPLEMENTARY ANALYTICS Product life cyclepotential insight (cont.) Typical Insight Provided by Product Life Cycle Analysis Introduction Introduction Growth Growth Maturity Maturity Decline Decline R&D R&D Changing Changing production production Foreign Foreign Trade Trade Some Some exports exports Significant Significant exports exports Few Few imports imports Falling Falling exports exports Significant Significant imports imports No No exports exports Significant Significant imports imports Overall

Overall Strategy Strategy Best Best period period to to increase increase market market share share R&D R&D engineering engineering are are key key functions functions Practical Practical to to change change price price or or quality quality image image Marketing Marketing the the key key function function Bad Bad time time to to increase increase market market share share particularly particularly ifif low-share low-share company company Having Having competitive competitive costs costs becomes becomes key key Bad Bad time time to to change change price price image image or or quality quality image image Marketing Marketing effectiveness effectiveness keys keys Cost Cost control control key key Competition Competition Few Few companies companies Risk Risk High High risk risk Risks Risks can can be be taken taken here here because because growth growth covers covers them them up up Cyclically Cyclically sets sets in in Margins Margins and and Profits Profits High High prices prices and and margins margins

Low Low profits profits Price Price elasticity elasticity to to individual individual seller seller not not as as great great as as in in maturity maturity Entry Entry Many Many competitors competitors Lots Lots or or mergers mergers and and casualties casualties High High profits profits Highest Highest profits profits Fairly Fairly high high prices prices Lower prices Lower prices than than introductory introductory phase phase Recession Recession resistant resistant High High P/Es P/Es Good Good acquisition acquisition climate climate Price Price competition competition Shakeout Shakeout Increase Increase in in private private brands brands Falling Falling prices prices Lower Lower profits/lower profits/lower margins margins Lower Lower dealer dealer margins margins Increased stability of Increased stability of market market shares shares and and price price structure structure Poor Poor acquisition acquisition climate: climate: Tough Tough to to sell sell companies companies Lowest Lowest prices prices and and margins margins Exits Exits Fewer Fewer competitions competitions Low Low prices

prices and and margins margins Falling Falling prices prices Prices Prices might might rise rise in in late late decline decline Source: M.E. Porter, Competitive Strategy, 1980, pp. 159161. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 145 - DRAFT CUSTOMER NEEDS STREAMSUPPLEMENTARY ANALYTICS Product life cycletop tips Do: Do: When When creating creatingthe the curve, curve, beware bewareof ofseasonal, seasonal, non-recurring non-recurringsources sourcesof of fluctuations: fluctuations: Hints Hints and and Pitfalls Pitfalls May Maybe benecessary necessaryto tosmooth smooththose thosefluctuations fluctuations Ensure Ensure you youunderstand understandififlife lifecycle cycleof ofaa product product has has been beenextended extended by by line line extensions/modifications extensions/modifications Dont: Dont: Ignore Ignoreversion versionchange change Market Marketsurveys, surveys, Nielsen Nielsen databases databases for: for: Benchmarks Benchmarksagainst againstsimilar similarproducts products Consumer take up Consumer take up Segment Segmentsales sales Data Data Sources Sources Client Clientsales sales data data The The following following documents documents contain containgood good examples examples of ofproduct productlife life cycle cycle analysis: analysis: Various Variousdocuments documentson onC4 C4Kbase, Kbase,Gemini GeminiCompass Compass

Case Case Examples Examples Related Related Analytics Analytics Key Key purchase purchase criteria criteriaand and comb comb analysis analysis Needs-based Needs-based segmentation segmentation Product portfolio Product portfolioanalysis analysis Scenario Scenariomodelling modelling Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 146 - Customer Needs Stream Analytics Introduction Segmentation and Targeting Cluster Analysis Customer Experience Key Purchase Criteria Product Life Cycle Product Substitution Adoption Cycle Conclusions DRAFT CUSTOMER NEEDS STREAMSUPPLEMENTARY ANALYTICS Product substitutionS-curve: introduction Why Why We We Use Use ItIt What What ItIt Is Is Substitution Substitutionis isthe theprocess processby bywhich whichone one product or service supersedes another product or service supersedes anotherin in performing performingaaparticular particularfunction functionfor foraabuyer buyer Successful Successfulsubstitution substitutionoften oftenfollows followsthe the shape shapeof ofan anS-curve: S-curve:

To Tounderstand/forecast understand/forecastmarkets marketsreaction reactionto tonew new product productintroduction introduction To Toassist assistin indirecting directingadaptation adaptationof ofstrategy strategyto tomarket market dynamics: dynamics: Generally Generallyused usedqualitatively qualitatively Along Alongthe theS-curve, S-curve,the thesubstitution substitutionprocess process gradually graduallyintensifies intensifiesas asititgoes goesthrough throughthe thethree three typical typicalphases: phases: Testing Testingphase phase Take-off Take-offphase phase Strengths Strengths & & Limitations Limitations Peak Peak At Ateach eachstage stagethe thecompetitive competitiveenvironment environment evolves evolves Usually Usuallylinked linkedto toproduct productfunctionality functionalityor or customer need customer need Often Oftenused usedin inconjunction conjunctionwith withconjoint conjoint analysis analysis Strengths: Strengths: Useful Usefulqualitative qualitativetool tool Limitations: Limitations: Assessing Assessingquantitatively quantitativelythe thethreat threatof ofsubstitution substitutioncan can be laborious and time consuming be laborious and time consuming Listing Listingall allsubstitutes substitutesrequires requireslateral lateralthinking

thinking Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 148 - DRAFT CUSTOMER NEEDS STREAMSUPPLEMENTARY ANALYTICS Product substitutiontypical S-curve High High prices prices Low Low supply supply High High uncertainty uncertainty Low Low awareness awareness Eventual Eventual upper upper bound bound may may be be higher higher than than original original market market UPPER BOUND Substitution as % of total demand Pioneer Pioneer switching switching Awareness Awareness increases increases Successful Successful precedents precedents are are set set Flaws Flaws appear appear and and are are fixed fixed TAKE-OFF PHASE INFORMING AND TESTING PHASE Uncertainty Uncertainty decreases decreases due due to to precedents precedents Pressure Pressure to to switch switch arises arises from from creation creation of of competitive competitive gap gap Costs Costs of of switching switching decrease decrease Competition Competition in in new new supply supply industry industry lowers lowers prices prices and and increases increases value value Time Source: Strategy Discipline Core Skills Learning Module, Substitution, September 1995. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm

- 149 - DRAFT CUSTOMER NEEDS STREAMSUPPLEMENTARY ANALYTICS Product substitutionS-curve: how to do it Understanding product substitution requires several stages of analysis: Define the Threat 1 Offensive Strategies Predict Evolution 2 Understand the economics Identify substitutes 3 Understand the dynamics Defensive Strategies List List all all potential potential substitutes substitutes Focus Focuson onproducts/ products/ process processthat thatcould couldfulfil fulfil similar function(s) similar function(s) Consider Consideroptions optionssuch such as: as: Not Notperforming performingthe the function functionat atall all Reducing Reducingusage usagerate rate Assess Assess the the threat threat of of substitutes substitutes Consider Considerboth bothquantitative quantitativeand and qualitative factors, qualitative factors,i.e.: i.e.: Relative Relativevalue/price, value/price,affected affectedby: by: usage usagerate, rate,financing financingcost, cost,value value proposition, proposition,etc. etc. Propensity Propensityto toswitch, switch,affected affectedby: by: resources/risk profile, resources/risk profile,etc. etc. Barriers Barriersto toswitching, switching,affected affectedby: by: cost, retaining and relearning, cost, retaining and relearning, etc. etc. Quantify

Quantifywhere wherepossible possibleand and make value judgement make value judgement Model Model the the S-curve S-curve Several Severalfunctions functionsexist existto tomodel modelthis thiscurve. curve. The The most widely used is the logistic curve. most widely used is the logistic curve. This Thiscurve curve has hasthe thefunction: function: F = e K. (t+c) F = Fr a ctio n o f to ta l p o te n tia l ma r k e t s u b s titu te d K, c = C o n s ta n ts ( to b e de termi ne d e mp ir ic a ll y) t = Ti me To Tofind findKKand andc,c,plot plotknown knownvalues valuesof ofF/(1-F) F/(1-F)on onaalog log scale scaleagainst againsttime timeon onaalinear linearscale scale The Thepoints pointsshould shouldlie lieon onaastraight straightline linewith withequation: equation: 1n F (1 - F ) = K.(t+c) Solve Solvethe thesimultaneous simultaneousequation equationto toget getK, K,ccand andplot plotFF against t to draw the S-curve against t to draw the S-curve Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm w h e re (1 - F ) - 150 - DRAFT CUSTOMER NEEDS STREAMSUPPLEMENTARY ANALYTICS Product substitutionS-curve: top tips Can Canaccount accountfor forindustry/firm industry/firmgrowth growthor ordecline decline

Potential Potential Insights Insights Do: Do: Assess Assessfactors factorsfor foreach eachof ofthe theindividual individualsegments segmentswithin withinthe thetarget targetmarket: market: Substitution Substitutionfollows followsdifferent differentpaths pathsinindifferent differentsegments segments Hints Hints and and Pitfalls Pitfalls Data Data Sources Sources Dont: Dont: Restrict Restrictthe themarket markettoo toomuch: much: Risk overlooking an impending Risk overlooking an impendingthreat threatof ofsubstitution substitutionfrom fromoutside outside Market Marketsurveys surveys Industry Industryreports reports Focus groups Focus groups The Thefollowing followingdocuments documentsinclude includegood goodexamples examplesof ofproduct productsubstitution substitutionanalysis: analysis: Various documents on C4 Kbase, Gemini Compass Various documents on C4 Kbase, Gemini Compass Product Productlife lifecycle cycle Adoption cycle Adoption cycle Scenario Scenariomodelling modelling Case Case Example Example Related Related Analytics Analytics To determine economies and substitutes To validate substitutes Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 151 - Customer Needs Stream Analytics

Introduction Segmentation and Targeting Cluster Analysis Customer Experience Key Purchase Criteria Product Life Cycle Product Substitution Adoption Cycle Conclusions DRAFT CUSTOMER NEEDS STREAMSUPPLEMENTARY ANALYTICS Adoption cycleintroduction Why Why We We Use Use ItIt What What ItIt Is Is Adoption Adoptionis isan anindividuals individualsdecision decisionto to become a regular user of a product become a regular user of a productor orservice service The Theadoption adoptioncycle cycleaccounts accountsfor forthe theprocess process through which a potential consumer through which a potential consumerpasses passes from fromfirst firsthearing hearingabout aboutproduct/brand product/brandto tofinal final adoption adoption That Thatprocess processcan canbe bedivided dividedinto into44stages: stages: Awareness: Awareness: the theconsumer consumerbecomes becomesaware aware of ofthe theproduct/brand product/brandbut butlacks lacksinformation information about aboutitit Qualification:

Qualification:the theconsumer consumerisisinformed informedand and considers considerswhether whetherto totry trythe theproduct/brand product/brand Trial: Trial:the theconsumer consumertries triesthe theproduct/brand product/brandto to improve improvehis hisestimate estimateof ofits itsvalue value Adoption: Adoption:the theconsumer consumerdecides decidesto tomake make full fulland andregular regularuse useof ofthe theinnovation innovation We Wegenerally generallyuse useititqualitatively qualitativelyto tohelp helpbuild buildan an effective effectivestrategy strategyfor forearly earlymarket marketpenetration: penetration: The Thenew newproduct/brand product/brandmarketer marketershould shouldinduce induceconsumer consumer transition transitionfrom fromone onestage stageto tothe thenext next Strengths Strengths & & Limitations Limitations Strengths: Strengths: Limitations: Limitations: Supplements Supplementssegmentation segmentationto tohelp helpfurther furtherfocus focusmarketing marketing efforts efforts n/a n/a Often Oftenused usedin inconjunction conjunctionwith withconjoint conjoint analysis analysis Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 153 - DRAFT CUSTOMER NEEDS STREAMSUPPLEMENTARY ANALYTICS

Adoption cyclehow to apply it Establish Establish at at which which stage stage of of aa cycle cycle your your market stands market stands Predict Predict future future developments developments Work Workon onthe thebasis basisof ofmarket marketresearchers researchersasking askingaa significant sample of consumers the following significant sample of consumers the following questions: questions: Are Areyou youaware awareof ofproduct/brand product/brandX? X? Would Wouldyou youbury buryproduct/brand product/brandX? X? Have Haveyou youtried triedproduct/brand product/brandX? X? Determine Determinelikely likelytiming timingthrough throughbenchmarking benchmarking with similar products/services with similar products/servicescategories categories Develop Developmarketing marketingscenarios scenariosand andtest testimpact impacton on adoption adoptioncycle cyclewith withcustomer customerfocus focusgroups: groups: Objective Objectivebeing beingto toidentify identifythe themost mostefficient efficientscenario scenarioto to speed speedup upadoption adoption Have Haveyou youpurchased purchasedproduct/brand product/brandXXwithin withinthe thelast last month? month? Etc. Etc. Note Notethat thatthe thefirst firstgroup groupnecessary necessaryAware Awarebut buthave have

not nottried triedisisderived derivedby bysingling singlingout outthose thoserespondents respondents who whoanswered answeredyes yesto tothe thefirst firstquestion questionand andno noto tothe the second. The same procedure is followed for the second. The same procedure is followed for the subsequent subsequentgroups. groups. Record Recordfindings findingsin inaaspreadsheet spreadsheetand andpresent present average results graphically average results graphically Analyse Analyseagainst againsttheoretical theoreticalcurve curve Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 154 - DRAFT CUSTOMER NEEDS STREAMSUPPLEMENTARY ANALYTICS Adoption cycletop tips Key Key factors factorsto to manage manageat at each each stage stage include: include: Awareness Qualification Potential Potential Insight Insight Trial Adoption Advertising volume Brand image (produced by advertising and packaging) Product characteristics, packaging and distribution efforts such as merchandising Similar to selection, plus after-sales services, etc. To To determine determine potential potentialproblem problem areas, areas,ititis is useful usefulto tostudy study the theclients clients relative relative position in each of these stages position in each of these stages Dos Dos Define Definethe the groupsto groupstoavoid avoid double doublecounting, counting,as as the the consumers consumerswho whodrop dropout outof of

each stage: each stage: Thus Thuseach eachgroup groupconsist consistof ofthose thosecustomers customerswho whoare areat ataacertain certainstage, stage,e.g. e.g.Aware, Aware,but butnot notat atthe thenext, next, e.g. e.g.Have Havetried tried(see (seebelow) below) Hints Hints & & Pitfalls Pitfalls Check Check the the methodology methodology of ofthe the market marketresearch research for fortypical typical errors: errors: Poor Poorsampling samplingprocedure procedure Vague questions Vague questionsor orquestions questionsthat thatare aredifficult difficultto tointerpret interpret Donts Donts Few Few market market research research surveys surveys segment segment the the categories categories as asneatly neatly as as Aware Aware ,, Qualify, etc.: Qualify, etc.: A Agood goodsubstitute substituteisislevel levelof ofconsumption consumption(Aware, (Aware,Have Havetried, tried,Buy Buyoccasionally, occasionally,Buy Buyfrequently) frequently) Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 155 - DRAFT CUSTOMER NEEDS STREAMSUPPLEMENTARY ANALYTICS Adoption cycledata sources, case examples and related analytics To To estimate estimate where where your yourtarget targetmarket marketfalls falls you youcan canrefer referto: to: Data Data Sources Sources Market

Marketsurveysusually surveysusuallyclient clientdriven driven Nielsen data Nielsen data The The following following documents documents contain containgood good examples examples of ofadoption adoptioncycle cycleanalysis analysis and and output: output: Case Case Examples Examples Related Related Analytics Analytics Various Variousdocuments documentson onC4 C4Kbase, Kbase,Gemini GeminiCompass Compass Key Key purchase purchase criteria criteria Segmentation Segmentation Product Productlife lifecycle cycle Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 156 - Customer Needs Stream Analytics Introduction Segmentation and Targeting Cluster Analysis Customer Experience Key Purchase Criteria Product Life Cycle Product Substitution Adoption Cycle Conclusions DRAFT CUSTOMER NEEDS STREAMCONCLUSIONS When conducting a customer analysis, always keep in mind fundamental caveats Top tips for conducting good customer analysis: Know what the segmentation will be used for and design questionnaires around strong hypotheses: Make sure that the research agency understands this process. You will always get best cluster definitions with thousands of samples and few well thought out questionsas opposed to hundreds of samples and long questionnaires: Respondents of interviews get bored with long and complex questionnairesresponse quality quickly drops. When setting up your questionnairesee document on interviewing training (Cambridge Shop New Analyst Training) on Gemini Compass: Make sure that wording is totally unambiguous: Test on idiots first! Use 4 or 6 point scales: Forces negative or positive responses (as opposed to neutral ones) Find a research agency that specialises in your industry sector and carefully manage the quality

of the sample, data handling and analysis: Agencies can make basic mistakesand no one usually notices They dont like you doing thisbut you need to! Plan to analyse the analysis output yourself: Research agencies dont achieve good insightwhatever they say Manage client expectations versus cost of research(could be 100,000+!) Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 158 - Profitability Stream Analytics Introduction Cost Structure Analysis Relative Cost Positioning Break-even Analysis Economies of Scale Experience Curve Price Elasticity Business/Unit Profitability Conclusion DRAFT ANALYTICS TO UNDERSTAND A CLIENTS STRATEGIC POSITION Profitability Stream: Questions and Analytics Strategic Position What are the (economic) boundaries of the businesses the company is in? How are they changing? Profitability Stream Strategic Questions Main Analytics How Howisispricing pricingdetermined? determined? What Whatare arethe thenatural naturalboundaries boundariesof ofunit unit cost costdrivers drivers(by (byproduct/geography)? product/geography)? Break-even Break-even analysis analysis Value Value chain chain Cost Cost structure structure Relative Relative cost-positioning cost-positioning How do companies create value in each of the businesses? How is this changing? How is the client company positioned relative to the competition to create value? How is it changing? How Howdo docompanies companiesmake makemoney? money? How Howisispricing pricingdetermined determinedin ineach each business? business? What Whatare

arethe themajor majorareas areasof ofunit unitcost cost position? position? What Whatare aretheir theirdrivers? drivers? How Howisisthe thecost coststructure structurechanging? changing? Why? Why? How Howwell wellisisour ourclient clientpositioned positionedto toset set prices pricesversus versusthe thecompetitors? competitors? What Whatis isthe thecost costposition positionof ofour ourclient client relative to its competitors? Is relative to its competitors? Isitit changing? changing? Economies Economies of of scale scale Experience Experience curve curve Price Price elasticity elasticity Business/Unit Business/Unit profitability profitability Core Analytic Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm Supplementary Analytic - 160 - Profitability Stream Analytics Introduction Cost Structure Analysis Relative Cost Positioning Break-even Analysis Economies of Scale Experience Curve Price Elasticity Business/Unit Profitability Conclusion DRAFT PROFITABILITY STREAMINTRODUCTION Profitability streamintroduction This section provides some basic analytics to understand the revenues and cost drivers: For the client. For the industry. Analytics complement, but do not detail how to construct economic models: See key documents in the A&D Kbase, Gemini Compass.

It does not detail approaches for business/benefits cases: See key documents in the A&D Kbase, Gemini Compass. It does not cover Activity Based Costing/Management: See the Guiding and Measuring Success competency group, and other material on the Gemini Compass. Financial accounts and ratio analysis can be found in the industry/competitors stream analytics. Net present value calculation can be found in the Developing and Evaluating options section. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 162 - DRAFT PROFITABILITY STREAMINTRODUCTION The profitability streamintroduction (cont.) Profitability Stream Analytics Cost structure analysis Relative cost positioning Break even analysis Experience curve Understanding Revenue/Cost Drivers? Price elasticity Economies of scale Core Analytics Supplementary Analytics Analytics Analyticsuseful usefulto tounderstand understandthese thesedrivers driversare aredetailed detailedas asthe thefollowing following pages. pages. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 163 - Profitability Stream Analytics Introduction Cost Structure Analysis Relative Cost Positioning Break-even Analysis Economies of Scale Experience Curve Price Elasticity Business/Unit Profitability Conclusion DRAFT PROFITABILITY STREAMCORE ANALYTICS Cost structure analysisintroduction Why Why We We Use Use ItIt What

What ItIt Is Is Graphically Graphicallypresents presents aacompanys companys cost cost structure structure Builds Builds cost costbars bars taking takingaccount accountof: of: The Thevarious various components components of of the the cost cost structure structure The Theimportance importance(relative (relative or orin in absolute absolute terms) of the components in the terms) of the components in the cost cost structure structure Understand Understand where whererevenues, revenues, costs costs and and profits profits are are incurred incurred Establish Establishcomparisons comparisonsbetween between cost coststructures structures for: for: AA product/business product/businessover overtime time AA product/business in each product/business in each of of several severalcompanies companies Several product lines in the same company Several product lines in the same companyfor forone one time period time period Strengths Strengths & & Limitations Limitations Strengths: Strengths: Allows Allows aa quick quick appreciation appreciation of of trends trends and and differences. differences. Provides Provides aa homogeneous homogeneous basis basis for forcomparison. comparison. Limitations: Limitations: None None Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 165 - DRAFT PROFITABILITY STREAMCORE ANALYTICS Cost structure analysishow to apply it Identify the different components of the cost structure by analysing the building blocks of the business/products:

Do not forget to take into account overheads. Allocate direct costs as they are. Allocate indirect costs in proportion. When building the graphs, many measures are available for the vertical axis, e.g.: Current currency value. Constant currency value. Percentage of sales. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 166 - DRAFT PROFITABILITY STREAMCORE ANALYTICS Cost structure analysisIllustrative output Cost Structure for One Product over Time Current Dollars Cost Structures for Same Product in Different Companies Current Dollars 1 00 100 Cost Structure for Different Products in One Company Current Dollars 80 80 1 00 80 60 60 1 20 60 40 40 40 20 20 20 0 0 1 97 7 1 9 79 19 8 1 1 983 Company A Company B Client 0 Company C Pro du c t A Pro d uc t B P rod u ct C Pro du c t D Annual sales ($mm) 100 120 150 170 Percentage of total sales 19 22 28 31 Cost components as percent of sales R&D Sales Advertising Materials Overhead

Source: MAC Group Core Practice Manual. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 167 - DRAFT PROFITABILITY STREAMCORE ANALYTICS Cost structure analysistop tips Potential Potential Insights Insights Hints Hints and and Pitfalls Pitfalls Assesses Assesses cost costdrivers: drivers: Helps Helpsidentify identifywhich whichcost costcomponents componentshave haveincreased increasedor ordecreased decreasedthe themost most Triggers questions for further research and analysis Triggers questions for further research and analysis Identifies Identifiespotential potential areas areasfor for value value differentiation differentiation Do: Do: Make Makesure sureyou youuse usecorrect correctmeasures measuresof ofaacompanys companyscosts costs(especially (especiallywith withcosts costsshared sharedamong amongproducts productsor or business businessunits) units) Check Checkaccuracy accuracyof ofcompetitors competitorsdata data Consider pure play benchmarks Consider pure play benchmarksfrom fromother othermarkets marketsififcompetitor competitorexample examplenot notavailable available Dont: Dont: Compare Comparecompeting competingproducts productsthat thatare arenot nottruly trulycomparable comparable Data Data Sources Sources Clients Clients internal internal data: data: Accounting Accountingsystems systems Competitors Competitors cost costdata

data are are generally generally much much more moredifficult difficultto to obtainyou obtainyou will will probably probably have have to to use an estimate use an estimate Look Look at at US USdata data for for benchmarks benchmarks which whichoften oftenhas hascosts costs split split out out Case Case Examples Examples The The following following documents documents contain containgood good examples examples of ofcost coststructure structure analysis analysis and andoutput: output: Related Related Analytics Analytics Value Value chain chain Competitors/company Competitors/company comparison comparison Break-even Break-evenanalysis analysis Cinven: Cinven: Paris Parisproject projectarchive archive Dawson DawsonInternational: International: London Londonproject projectarchive archive Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 168 - Profitability Stream Analytics Introduction Cost Structure Analysis Relative Cost Positioning Break-even Analysis Economies of Scale Experience Curve Price Elasticity Business/Unit Profitability Conclusion DRAFT PROFITABILITY STREAMCORE ANALYTICS Relative cost positioningintroduction Why

Why We We Use Use ItIt What What ItIt Is Is Assesses Assessesthe thecost costposition positionof ofaafirm firmfor foraa product relative to that of a competitor: product relative to that of a competitor: Highlights Highlightsdifferences differencesbetween betweencompetitors, competitors,and andin in particular, particular,determines determinessources sourcesof ofcost costadvantage: advantage: Can Canlead leadto tocost costsaving savingthrough throughimitation imitation Measure Measureof ofaafirm firmcost costadvantage/disadvantage advantage/disadvantage Should Shouldbe beassessed assessedat ateach eachstage stageof ofthe the value chain value chain Breaks Breaksdown downinputs inputsand andoutputs: outputs: Volume/value Volume/valueof ofoutputs: outputs: Raw materials Raw materials Labour Labour Overheads Overheads Maps Mapsphysical physicalproduction productionprocess process Strengths Strengths & & Limitations Limitations Tends Tendsto tobe becorrelated correlatedwith withrelative relativemarket market share share(RMS) (RMS) Strengths: Strengths: Limitations: Limitations:

Remains Remainseffective effectiveeven evenwhen whencomparing comparingproducts productsof of different brands or quality levels: different brands or quality levels: The Thecost costposition positioncan canbe belocked lockedwith withthe theprice pricerealisation realisation of each supplier indexed at 100 of each supplier indexed at 100 Can Canbe bedifficult difficultto toestablish establish Expensive and worth Expensive and worthdoing doingonly onlywhen whenthe theproducts productsbeing being compared have a high turnover compared have a high turnover Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 170 - DRAFT PROFITABILITY STREAMCORE ANALYTICS Relative cost positioninghow to do it If competitors compete in the same segment, and you know their profits and prices, you can infer the relative cost position (RCP): a RPP RPPa ROS ROS RCP RCP Client Client 1002% 1002%100 100(98) (98) Competitor Competitor 95 95 5% 5%92 92(90) (90) Calculation Calculationexample: example: Price Priceof ofcompetitor competitor==95% 95%of ofclient client ROS ROSfor forcompetitor competitor==5% 5% Competitor Competitorcosts costs==95% 95%xx95% 95%==90% 90% Client Clientcost costposition

position==98% 98% Competitor Competitorcost costposition position==90/98 90/98xx100 100==92% 92% Source: Richard Koch, Training Session 4, February 1998, South African POA. a. Relative price position. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 171 - DRAFT PROFITABILITY STREAMCORE ANALYTICS Relative cost positioningillustrative output Relative Cost of Production of Mens Placket Shirt (High Labour Content) (in US$/Dozen) $37.77 0.62 1.79 0.62 1.67 $34.96 0.62 1.59 $33.72 11.07 Store Advertising Irregulars/Carry Cost 3.18 Additional Freight and Duty 28.34 Product Cost 35.36 a 21.6 US Far East El Salvador a. Includes quota cost. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 172 - DRAFT PROFITABILITY STREAMCORE ANALYTICS Relative cost positioningpotential insight Explaining Explaining aa Companys Companys Cost Cost Advantage Advantage What What to to Do? Do? Lower Lowerinput inputcosts: costs: Raw Rawmaterials materials Labour Labour Overhead Overhead Not lowest Cost Greater Greaterproductivity: productivity: Technology Technology Know-how Know-how Operating Operatingskill skill Costs Costsshared sharedwith withother othersegment(s)

segment(s) Company Companyis isleader leaderin infocused focusedsegment segment Lowest Cost Cost Costreduction reduction essential essential Relative Relativecost cost position positionanalysis analysis valuable valuable Sell/JV Sell/JVor or Harvest Harvest Reinforce Reinforcemarket market leadership leadership Reinforce Reinforcecost cost leadership leadership Gain Gainmarket market share sharequickly quickly Buy Buyleader leader Segment Leader Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm Segment Follower - 173 - DRAFT PROFITABILITY STREAMCORE ANALYTICS Relative cost positioningtop tips Do: Do: Remember Rememberthat thatclients clientsdo donot notgenerally generallyhave havecosts costsequal equalto tocompetitors competitors Hints Hints and and Pitfalls Pitfalls Data Data Sources Sources Case Case Examples Examples Related Related Analytics Analytics Clients Clientsand andcompetitors competitorscost costdata: data: Industry Industryreports reports The Thefollowing followingdocuments documentscontain containgood

goodexamples examplesof ofrelative relativecost costpositioning positioningand andoutput: output: Ex-employees Ex-employeesof ofcompetitors competitors(qualitative (qualitativesurvey) survey) Dawson DawsonInternational: International: London Londonproject projectarchive archive See Seealso alsoRichard RichardKoch KochTraining TrainingSession Session(South (SouthAfrica AfricaPOA) POA) Break-even Break-evenanalysis analysis Cost Coststructure structureanalysis analysis Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 174 - Profitability Stream Analytics Introduction Cost Structure Analysis Relative Cost Positioning Break-even Analysis Economies of Scale Experience Curve Price Elasticity Business/Unit Profitability Conclusion DRAFT PROFITABILITY STREAMCORE ANALYTICS Break-even analysisintroduction Why Why We We Use Use ItIt What What ItIt Is Is Break-even Break-evenlevel levelis isthe thelevel levelof ofoutput outputat at which the company makes neither which the company makes neitheraaloss lossnor

nor aaprofitjust profitjustcovers coversits itscosts costs Important Importantcross-over cross-overpoint: point: Helps Helpsset setminimum minimumsales salestargets targets Helps set price levels, but Helps set price levels, butis isnot notthe theonly onlydeterminant: determinant: Driven Drivenby byother otherfactors factorssuch suchas ascustomer customerneeds needsand and competitor competitoractions actions Any Anylower lowerand andthe thecompany companymakes makesaaloss loss The Theanalytic analyticestablishes establishesaarelationship relationship between: between: Fixed Fixedcosts costs Variable Variablecosts costs Revenues Revenues Entire Entirecompany company Individual Individualproduct productline line Particular manufacturing Particular manufacturingoperation operation Applies Appliesto: to: Strengths Strengths & & Limitations Limitations Strengths: Strengths: Useful Usefultool toolfor forpresenting presentinginformation informationand andexplaining explaining the thedynamics dynamicsof ofaaproduction productionunit unit Limitations: Limitations: Static Staticanalytic: analytic: Many Manycosts costsare

areconsidered consideredfixed fixedininthe theshort shortrun runbut butvariable variable over overthe thelong longterm term Very Veryoften oftenthe therelationship relationshipbetween betweenprofit profitand andvolume volume is not linear: is not linear: Assumptions Assumptionsunderlying underlyingthe thechart chartmay maynot notbe be100% 100%accurate accurate Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 176 - DRAFT PROFITABILITY STREAMCORE ANALYTICS Break-even analysishow to do it and illustrate output Illustrative output How to do it Illustrative Break-even Charta 1. 1. Gather Gatherdata dataneeded, needed,i.e.: i.e.: ev en ue Li ne 300 2. 2. Plot Plotthe thecosts costsand andrevenue revenuelines lineson onaagraph: graph: Start Startwith withthe thefixed fixedcosts costsline linewhich whichhas hasfunction: function: yy==(value of fixed costs) (value of fixed costs) Determine Determinewhat whatfunction functiongoverns governsvariable variablecosts costs and represent it graphically on top and represent it graphically on topof ofthe thefixed fixedcost cost line line 3. 3. The Thebreak-even break-evenpoint pointstands standsat

atthe the intersection of cost and revenues intersection of cost and revenueslines: lines: The Thebreak-even break-evenpoint pointisisthe thenumber numberof ofunits unitssold sold for which operating profit = 0 in the following for which operating profit = 0 in the following equation: equation: OP OP==[(USP) [(USP)xx(NUS)] (NUS)]--[FOC [FOC++(UVC) (UVC)xx(NUS)] (NUS)] where: where: OP: OP:operating operatingprofit profit USP: unit selling USP: unit sellingprice price NUS: NUS:number numberof ofunits unitssold sold FOC: FOC:fixed fixedoperating operatingcosts costs UVC: UVC:unit unitvariable variablecosts costs 200 150 100 To ta lR 250 Revenue and Costs ($000s) Total Totalcosts costs Break Breakdown downof oftotal totalcosts costsinto intofixed fixedand andvariable variable Associated volumes Associated volumes Associated Associatedrevenue revenue To ta Profit t os lC ne Li Budget Values Break-even point Variable Costs 50 Fixed Costs

Loss 0 375 0% 25% 750 1,125 1,500 50% 75% 100% Units Capacity a. Ciaran Walsh, Key Management Ratios, How to Analyse, Compare and Control the Figures that Drive Company Value, 1996, p. 223 FT Pitman Publishing. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 177 - DRAFT PROFITABILITY STREAMCORE ANALYTICS Break-even analysistop tips States Statesthe the target targetoutput outputabove abovewhich whichthe thecompany company becomes becomesprofitable profitable Potential Potential Insights Insights Hints Hints and and Pitfalls Pitfalls Do: Do: Take Take sufficient sufficient care care to to distinguish distinguishbetween between fixed, fixed, variable, variable,and andsemi-variable semi-variable costs costs Consult a textbook on cost accounting of managerial economies Consult a textbook on cost accounting of managerial economies Dont: Dont: Use Use break-even break-even analysis analysis as as the the only only measure measure of ofthe the viability viability of ofaa business, business,division, division, or project or project Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 178 - DRAFT PROFITABILITY STREAMCORE ANALYTICS Break-even analysisdata sources, case examples, and related analytics Companys Companys internal internal cost costand and revenue revenue data: data: Divisional Divisionalaccounts accounts Data

Data Sources Sources The The following following documents documents contain containgood good examples examples of ofbreak-even break-even analysis analysis and and output: output: Case Case Examples Examples Break-even Break-evenanalysis analysisis is aa critical critical step step within withinprofitability profitability analysis analysis and and is isoften often used used in conjunction with: in conjunction with: Related Related Analytics Analytics Relative Relativecost costposition position Economies Economiesof ofscale scale Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 179 - Profitability Stream Analytics Introduction Cost Structure Analysis Relative Cost Positioning Break-even Analysis Economies of Scale Experience Curve Price Elasticity Business/Unit Profitability Conclusion DRAFT PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS Economies of scaleintroduction Why Why We We Use Use ItIt What What ItIt Is Is AAcompany companyor orindustry industrybenefits benefitsfrom from aa economies of scale when economies of scale whenthe theunit unitcost costof ofaa product

declines as the number of units product declines as the number of units produced producedper perperiod periodincreases: increases: Unit Cost Understand Understandthe theimportance importanceof ofrelative relativesize sizeand and relative relativecost costwithin withinan anindustry industry Highlight Highlightthe theexistence existenceof ofaaminimum minimumefficient efficientsize: size: Below this, it is not cost-effective to compete Below this, it is not cost-effective to compete Determine Determinewhether whetherscale scaleacts actsas asaabarrier barrierto toentry entry Company B has a much lower unit cost because it produces a much higher value A B Company A Company B Strengths Strengths & & Limitations Limitations Number of Units Produced Typically, Typically,we weuse usethe theconcept conceptqualitatively qualitativelynot not quantitatively: quantitatively: To Tounderstand understandthe thenature natureof ofcompetition competitionininaa business market or segment business market or segment We Weare areunlikely unlikelyto toquantify quantifyeconomies economiesof ofscale scale across acrossan anindustry industry

Strengths: Strengths: Fundamental Fundamentaleconomic economicconcept conceptrelevant relevantat atboth bothaa company and industry level company and industry level Helps Helpsbuild buildunderstanding understandingof ofthe thestructural structural characteristics characteristicsof ofan anindustry industry Can Canprovide provideaaquantitative quantitativemeasure measureof ofthe thebenefit benefitof of scale, and an estimate of optimum size scale, and an estimate of optimum size Limitations: Limitations: None None a. It is also possible to have dis-economies of scale, i.e. as more units are produced, the unit cost increases. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 181 - DRAFT PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS Economies of scalehow to apply it Gemini practice usually unfolds in two steps: To To Determine Determine Whether Whether Scale Scale is is Critical Critical to to Success Success Identify Identifycompetitors competitorsin inthe themarket marketor orsegment segment Determine absolute and relative size of Determine absolute and relative size ofcompetitors, competitors,and andabsolute absoluteand andrelative relative returns returns(profit, (profit,ROCE, ROCE,ROE): ROE): See Seecompany companyanalysis analysisand andfinancial financialanalysis analysis Determine absolute and relative share: Determine absolute and relative share: See Seemarket-sizing market-sizing Identify Identifytype typeof ofproducts productsproduced,

produced,and andnumber numberof ofunits unitsproduced produced Identify key success factors: Identify key success factors: See Seekey keysuccess successfactors factors Review Reviewall allof ofthe theabove aboveto todetermine: determine: Whether Whetherscale scaleof ofoperation operationisiscritical criticalto tosuccess successininthis thismarket marketor orsegment segment If so, why? If so, why? Minimum Minimumscale? scale? Quantify Quantify Economies Economies of of Scale Scale By Bycompetitor, competitor,plot: plot: a Average Averageunit unitcost costa(y (yaxis) axis)over overaa specified period specified period Number Numberof ofunits unitsproduced producedover oversame same period (x axis) period (x axis) a. Given that average unit cost is unlikely to be available for all competitors, you could use average unit price as a substitute for cost. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 182 - DRAFT PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS Economies of scaleillustrative output Production Economies of Scale German Soft Drink Bottlers 10.0 9.0 8.0 2.0 1.5 1.0 .9 .8 .7 .6 .5 .4 .3 Production Costs per Unit DM/Case 7.0 6.0 5.0 4.0 3.0 In this case, economies of scale are present, but not of major importance: A doubling of volume, from 1 million

leads to only a 23% decrease in cost. .2 0.1 .1 .5 1 5 10 Total Productions (Cases) Millions Source: MAC Group, Core Practice Manual. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 183 - DRAFT PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS Economies of scaletop tips Analytic Analytic helps helpsdetermine: determine: Minimum Minimumefficient efficientsize size Whether the presence Whether the presence of ofscale scaledeters deters market market or orsegment segmententry entry by: by: Potential Potential Insight Insight Hints Hints and and Pitfalls Pitfalls Forcing Forcingthe theentrant entrantto toproduce produceon onaalarge largescale scaleand andrisk riskstrong strongreaction, reaction,or orproduce produceon onaasmall smallscale scaleand and accept acceptaacost costdisadvantage disadvantage Some Some limits limits to toeconomies economies of ofscale scale as asan anentry entry barrier barrierare are as as follows: follows: Large Largesale salebusiness businessmay mayinvolve involvemaking makingtrade-offs trade-offswith withother otherpotentially potentiallyvaluable valuablebarriers barriersto toentry entrysuch such as asproduct productdifferentiation differentiation Technological Technologicalchange changemay maybe becatastrophic catastrophicfor foraalarge-scale large-scalefirm

firmififits itsfacilities facilitiesare aremore morespecialised specialised Do: Do: Make Make sure sure you you use use comparable comparable data data when when plotting plotting different differentcompanies companies Examine Examine carefully carefullycause cause and and effect effectrelationships relationships when when the the number numberof ofdata data points points is is limited limited Ensure Ensure the the concept concept is is applicable applicable by by comparing comparingthe theindividual individual plants plants along alongseveral several dimensions other than scale: dimensions other than scale: Decreasing Decreasingcosts costsmay maybe bedue dueto tofactors factorsother otherthan thanscale, scale,such suchas aslabour labourrates, rates,age ageof ofequipment, equipment,etc. etc. Dont: Dont: Use Usedata data from fromdifferent differentperiods: periods: Experience Experienceeffect effectwill willdistort distortthe thedata data Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 184 - PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS Economies of scaledata sources, case examples and related analytics Data Data Source Source DRAFT Industry Industry reports reports Brokers Brokers reports reports Competitors Competitors financial financialstatements statements Companies internal

cost Companies internal costdata data Database Database searches searches The The following following documents documents contain contain goods goodsexamples examples of ofeconomy economyof ofscale scale analysis: analysis: Case Case Examples Examples Related Related Analytics Analytics Experience Experience curve curve Value Value chain chain Economies Economiesof ofscope scope Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 185 - Profitability Stream Analytics Introduction Cost Structure Analysis Relative Cost Positioning Break-even Analysis Economies of Scale Experience Curve Price Elasticity Business/Unit Profitability Conclusion DRAFT PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS Experience curveintroduction Why Why We We Use Use ItIt What What ItIt Is Is Quantifies Quantifiesthe theeffect effectof ofaacompanys companys accumulated experience accumulated experienceon onunit unitcosts: costs: Also Alsoknown knownas asthe thelearning learningcurve curve The Thehypothesis

hypothesisunderpinning underpinningthe theexperience experience curve is that, over time, companies curve is that, over time, companiesbecome become faster fasteror orbetter betterat atproducing producingtheir theirgoods goodsor or services: services: Determines Determineswhether whetheraccumulated accumulatedknowledge knowledgegives givesaa competitive competitiveadvantage advantageto toincumbents incumbents Determines Determinesrelative relativecost costadvantages advantagesof ofcompetitors competitors Potentially, to develop share-gain strategies Potentially, to develop share-gain strategiesthat that exploit exploitthe theexperience experiencecurve curve Where Wherethis thisisistrue, true,over overtime, time,the theunit unitcost costto to produce produceaaproduct productdeclines declines In Insome someindustries, industries,accumulated accumulatedexperience experience or knowledge can create or knowledge can createsignificant significant competitive competitiveadvantage: advantage: Incumbents Incumbentscan canbe besignificantly significantlyfaster fasteror orcheaper cheaper than thannew newentrants entrantsbecause becausethey theyeffectively effectivelyapply apply knowledge knowledgebased basedon onexperience experience Developed Developedby bythe theBoston BostonConsulting ConsultingGroup Groupin in

1926 as the Learning Curve, less frequently 1926 as the Learning Curve, less frequently used usedas asquantitative quantitativetool tool Typically Typicallywe weuse usethe theconcept conceptqualitatively, qualitatively,not not quantitatively, to understand relative quantitatively, to understand relative competitive competitiveadvantages advantageswithin withinaabusiness business market marketor orsegment segment Strengths Strengths & & Limitations Limitations Strengths: Strengths: Limitations: Limitations: As Asaaconcept, concept,describes describesimportance importanceof ofaccumulated, accumulated,applied applied knowledge in building advantage knowledge in building advantage Can Canbe bevery veryrelevant relevantinincertain certainindustries industrieswhere whereexperience experience can build competitive advantage can build competitive advantage Assembling Assemblingthe thedata datafor foran anexperience experiencecurve curveanalysis analysisisis often oftentime-consuming time-consuming Product Productinnovation innovationcan canrender renderthe thecurrent currentexperience experiencecurve curve useless uselessas asaastrategy strategytool tool You Youshould shouldquestion questionwhether whetheryou youneed needto toquantify quantifythe theeffect effect for foryour yourclient, client,and andififititisisfeasible feasibleto todo

doso so As Asaaquantitative quantitativetool, tool,isisless lessfrequently frequentlyused usedtoday, today,because because of ofdifficulty difficultyestablishing establishingaccumulated accumulatedproduction productionvolume volume Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 187 - DRAFT PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS Experience curvehow to do it The experience curve is based on: Accumulated production data. Unit cost data for the entire industry and individual competitors. Accumulated production is often difficult to calculate: It is the total number of units of a product made by the company (or the total number of units of a product made by all players in the market). Plot accumulated volume against unit cost on graph. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 188 - DRAFT PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS Experience curveillustrative output Illustrative Experience Curve Log Unit cost ($) 50 1974 40 The slope of this curve is 20%, meaning that with each doubling in volume, unit cost decreases by 20%. Slope 20% 1978 1975 1976 30 1980 1977 1979 1981 1982 1983 20 1984 The curve has been extrapolated to predict future cost levels. We could plot various competitors against the curve. 10 200 400 600 800 1,000 2,000 4,000 Accumulated Unit Volume (log) (000s) Source: MAC Group, Core Practice Manual. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 189 - DRAFT PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS Experience curveillustrative output (cont.) The Experience Curve as a Diagnostic Tool Firm Real Unit Costs 1990

1997 Observed 93% curve The theoretical curve represents the industry standard The observed company seems to learn at a lower speed than average competitor Theoretical 80% curve Catch-up Catch-up A simple gap analysis highlights opportunities to drive down cost to industry standards Firm Accumulated Experience Source: R. Koch Training Session 4, February 1998, South African POA. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 190 - DRAFT PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS Experience curvetop tips Strategies Strategies based based on on experience experiencecurve curve analysis analysis are areparticularly particularly effective effectiveindustries industries where: where: Cost Costisisaasignificant significantcompetitive competitivefactor factor Expertise is developed Expertise is developedthrough throughexperience experience Potential Potential Insight Insight AAwhole whole set set of ofstrategic strategic options options can can be be derived derivedfrom fromthe the experience experiencecurve curve (see (see indicative outputs): indicative outputs): In Inrelation relationto tocompetitors competitorsrelative relativecost costposition position In relation to competitors relative price In relation to competitors relative priceposition position The The experience experiencecurve curve is is no noguarantee guarantee that thatcosts costs will willdecrease: decrease: The Thecompany companymust mustactively activelymanage managecosts costsdown down Theoretically, Theoretically, experience experience curve curve effects effects decrease

decreasein inrelative relative importance importanceover overtime: time: The Thegreatest greatesteffects effectsoccur occurininthe theearly earlystages stages Do: Do: Use Use ititas as aa concept conceptrather ratherthan than try try to to quantify quantifyan an experience experience curve curve for foryour yourclient client Total market revenue Use Use price price data data ififcost costdata data is is not notavailable available Average industry price = [ Hints Hints and and Pitfalls Pitfalls Total market volume ] Dont: Dont: Use Use cost costdata data that thatare are not notdefined defined in inthe the same same manner manner Take into account overheads and costs not related Take into account overheads and costs not relatedto to what whatyou youare arestudying studying when when using using company company cost-accounting cost-accountingdata data Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 191 - PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS Experience curvedata sources, case examples, and related analytics DRAFT Company Company internal internal data data for: for: Data Data Sources Sources Costs Costs Accumulated Accumulatedproduction production Government Governmentagencies agencies and and trade trade associations

associations for for historical historical accumulated accumulatedindustry industry production production The The following following documents documents contain contain good good examples examplesof ofexperience experiencecurve curveanalysis: analysis: Case Case Examples Examples Economies Economiesof ofscale scale Related Related Analysis Analysis Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 192 - Profitability Stream Analytics Introduction Cost Structure Analysis Relative Cost Positioning Break-even Analysis Economies of Scale Experience Curve Price Elasticity Business/Unit Profitability Conclusion DRAFT PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS Price elasticityintroduction Why Why We We Use Use ItIt What What ItIt Is Is Measure Measureof ofthe theresponsiveness responsivenessof ofdemand demandto to changes in price: changes in price: IfIfdemand demandisiselastic, elastic,ititisisresponsive responsiveto tochanges changesinin price price IfIfdemand demandisisinelastic, inelastic,ititisisunresponsive unresponsiveto tochanges changes ininprice price Helps Helpsto

tounderstand understandcustomer customerpurchase purchasebehaviour behaviour Determines customer sensitivity to price changes: Determines customer sensitivity to price changes: Model Modelof oflikely likelydemand demandunder underdifferent differentpricing pricingsituations situations Price Priceelasticity elasticityof ofdemand demandis ismeasured measuredas: as: [ e= V% P% = Volume change Price change ] Strengths Strengths & & Limitations Limitations In Ingeneral, general,two twofactors factorsdetermine determineelasticity: elasticity: Long-term Long-termprice priceelasticity elasticitymay maydiffer differfrom from short-term price elasticity: short-term price elasticity: Strengths: Strengths: Limitations: Limitations: Availability Availabilityof ofsubstitute substitutegoods goods Number of uses to which Number of uses to whichgoods goodsmay maybe beput put See Seeadoption adoptioncycle cyclep.xx p.xxand andproduct productlife lifecycle. cycle. Measuring Measuringprice priceelasticity elasticityof ofdemand demandmay maybe be aakey

analytic in marketing strategy work key analytic in marketing strategy work Provides Providesaaquantitative quantitativemeasure measureof ofcustomer customer responsiveness to price changes responsiveness to price changes Helps Helpsto tounderstand understandbetter bettercustomer customerbuying buyingdecisions decisionson onaa particular product particular product Factors Factorsother otherthan thanprice pricecan caninfluence influencedemandneed demandneedto to understand understandthe theimpact impactof ofthese thesevariables variables Can Canbe bedifficult difficultto toobtain obtainmeasures measuresof ofprice priceand andvolume volume changes changes Considerable Considerableskills skillsneeded neededto tobuild buildthe theappropriate appropriatemodel model and andfitfitthe thedata datawith withthe theproper properstatistical statisticaltechniques techniques Provides Providesonly onlyan anhistorical historicalperspective perspective Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 194 - DRAFT PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS Price elasticityhow to apply it Approach Approach Agree Agreescope scopeof ofanalysis: analysis: Product Product Market Market(e.g. (e.g.which whichcountry? country?National Nationalor orregional?) regional?) Period to cover (and

time intervals between Period to cover (and time intervals betweenprice pricedata) data) Identify Identifyand andgather gatherappropriate appropriateprice priceand andvolume volume data: data: IfIfprice pricedata datais isnot notavailable, available,consider considerrunning runningaa price experiment: price experiment: Gather Gatherrequired requiredprice priceand andvolume volumedata dataininaapilot pilotstudy study Test impact of price reductions or increases Test impact of price reductions or increases Results Resultsfrom fromaaprice priceexperiment experimentshould shouldbe beviewed viewed as only indicative guidance: as only indicative guidance: May Mayneed needto tomake makejudgements judgementson onissues issuesabout aboutprice price differentials between stores and/or geographic differentials between stores and/or geographicregions regions Check Checkdata datato toensure ensureititis isaccurate accurate Calculate elasticity over the Calculate elasticity over thespecified specifiedperiod periodusing using the formula: the formula: [ Overcoming Overcoming Data Data Gaps Gaps e= V% P% = Volume change Price change Timeframe

Timeframelikely likelyto tobe betoo tooshort short Could be other variables influencing Could be other variables influencingresults resultsthat thatwould would have haveless lessimpact impactover overaalonger longerperiod period Look Lookfor forcomparable comparablestudies: studies: ] Price Priceand andvolume volumedata datafor forsimilar similarcompanies companies Price and volume data for similar industries Price and volume data for similar industries Repeat Repeatformula formula Give Giveexample exampleof ofcalculation calculation Interpret Interpretresults: results: If Ifelasticity elasticityisisgreater greaterthan than1, 1,aa1% 1%decrease decreaseininprice pricewill will lead to more than a 1% increase in volume lead to more than a 1% increase in volume If Ifelasticity elasticityisisless lessthan than1, 1,aa1% 1%decrease decreaseininprice pricewill will lead to less than a 1% increase in volume lead to less than a 1% increase in volume Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 195 - DRAFT PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS Price elasticityillustrative output Example of Elasticity Calculation for Beer Market Observation of the Elasticity of Beer Volume to Its Price Calculation of the Elasticity of Beer Volume to its Price 130 100 90

100 106.2 120 Elasticity 110 Price change Beer BeerVolume Volume Volume change A 10% price decrease leads to a 6.2% volume increase 100 90 Beer price elasticity is: 80 e Beer BeerPrice Volume 70 1968 1974 1980 1986 1992 1998 V % 6.2% 0 .62 P% 10% Source: Bossard/United Distillers, Impact of Taxation Rates on Government Revenues, October 1997. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 196 - DRAFT PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS Price elasticityillustrative output (cont.) Regression enables us to discover complex multiple relationships. Example of Multiple Regression on Cider Market Example of Multiple Regression Cider Volume =B + A1 * Cider Price + A2 * Beer Price + A3 * Wine Price + A4 * Temperature Data Available to Explain Cider Market Behaviour ESTIMATED B = -315.81 A1 = -0.84 A2 = 3.16 A3 = 1.05 A4 = 0.70 170 150 130 Explained Cider Volume 160 Wine Price Explanation of Changes in Cider Volume Temperature 140 120 110 100 Temperature 90 80 Beer Price 60 Cider Price 40 Cider Volume 20 1995 1996 1993 1994

1991 1992 1990 1988 1989 1986 1987 Note: Variables are indexed. 1985 0 1983 1998 1984 1994 1982 1990 1980 1986 1981 1982 Beer price Cider price 1979 1978 1977 50 1974 Wine price 1978 70 Source: Bossard/United Distillers, Impact of Taxation Rates on Government Revenues, October 1997. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 197 - DRAFT PROFITABILITY STREAMSUPPLEMENTARY ANALYTICS Price elasticitytop tips Analytic Analyticcan canhelp: help: Forecast Forecastthe thelikely likelyrevenue revenueimpact impactof ofprice pricechanges changes Determine an appropriate pricing strategy Determine an appropriate pricing strategy Potential Potential Insights Insights Do: Do: Use Uselogarithmic logarithmicscales scaleson onboth bothaxes axes Price sensitivity will often vary Price sensitivity will often varyconsiderably considerablyby bycustomer customerand andproduct productsegment: segment: Hints Hints and and Pitfalls Pitfalls Be Becareful

carefultotodefine defineaccurately accuratelythe themarket marketsegment segmentfor forwhich whichprice pricesensitivity sensitivityisisto tobe beestimated estimated Do Donot: not: Overlook Overlookthe thefact factthat thatififthe thecompany companychanges changesmarketing-mix marketing-mixfactors factorsother otherthan thanprice, price,the theeffect effectof of the theprice pricechange changeitself itselfwill willbe behard hardto toisolateconjoint isolateconjointanalysis analysiswill willhelp helpdo dothis this Data Data Sources Sources Internal Internalcompany companydata: data: Values Values Prices Prices Publicly Publiclyavailable availabledata: data: Market Marketresearch researchprice pricelevels levelsand andvolumes volumes Studies of comparable companies Studies of comparable companiesor orindustries industries The Thefollowing followingdocuments documentscontain containgood goodexamples examplesof ofanalysis analysisof ofprice priceelasticity elasticityof ofdemand: demand: Conjoint Conjointanalysis analysis(see (seeCompetency CompetencyGroup): Group): Case Case Examples Examples Related Related Analytics Analytics Good Goodfor forestimating estimatingfuture futurepotential potential

Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 198 - Profitability Stream Analytics Introduction Cost Structure Analysis Relative Cost Positioning Break-even Analysis Economies of Scale Experience Curve Price Elasticity Business/Unit Profitability Conclusion DRAFT PROFITABILITY STREAMCORE ANALYTICS Business/unit profitabilityintroduction Why Why We We Use Use ItIt What What ItIt Is Is Measures Measuresthe theprofitability profitabilityof: of: Businesses Businessesacross acrossaacompanys companysportfolio, portfolio,or or Competitors Competitorsininaabusiness businessor orsegment segment Profitability Profitabilitymeasured measuredas: as: Return on sales (ROS), Return on sales (ROS),or or Input Inputto todeveloping developingbusiness businesssegment segmentstrategy: strategy: Used, Used,ininparticular, particular,with withcompetitive competitiveposition positionand andsegment segment attractiveness attractivenessanalyses. analyses. At Ataacorporate corporatelevel, level,provides providesdata dataon onrelative relativeperformance performance of business units. of business units.

At Ataabusiness businesssegment segmentlevel, level,provides providesdata dataon onreturns returns generated generatedwithin withinthe thesegment. segment. Return Returnon oncapital capitalemployed employed(ROCE) (ROCE) Strengths Strengths & & Limitations Limitations Strengths: Strengths: Quantifies Quantifiesrelative relativeperformance performanceof ofbusiness businessunits, units,or or Quantifies relative returns (and hence attractiveness) Quantifies relative returns (and hence attractiveness)of ofaa business businessor orsegment. segment. Limitations: Limitations: For Foraccurate accurateresults resultsat atsegment segmentlevel, level,requires requiressignificant significant time, time,effort, effort,and anddata. data. Estimating EstimatingROS ROSor orROCE ROCEfor foraabusiness businessunit unittakes takestime timeifif good goodinternal internaldata dataisisnot notavailable. available. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 200 - DRAFT PROFITABILITY STREAMCORE ANALYTICS Business/unit profitabilityhow to apply it At At Corporate Corporate Level Level At At Business Business or or Unit Unit Level Level (Portfolio (Portfolio of of Businesses) Businesses) See See financial financialanalysis analysis for for how howto tocalculate calculateROS

ROS and ROCE and ROCE Operating Profit = Sales - Full Allocated Costs Identify products per business segment Calculate turnover, direct costs, indirect costs, and overheads for each product Operating Profit for = Segment ROS = Product Sales Operating profit Sales Product Direct Costs Product Indirect Costs ROCE = Operating profit Capital Employed Indirect costs and overheads should be allocated proportionally to resource All costs must be allocated across the full set of business segments Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 201 - DRAFT PROFITABILITY STREAMCORE ANALYTICS Business/unit profitabilityillustrative output Business Unit Business Unit ROS % Operating Profit Interest Gross Margin Gross Sales Overhead Expenses R&D Costs Admin. Expenses 1 Direct Expense 2 3 4 Business Units Return on Capital Employed ROCE % 1 2 3 4 Business Units Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 202 - DRAFT PROFITABILITY STREAMCORE ANALYTICS Business/unit profitabilitytop tips Potential Potential Insights Insights Reveals Revealslevers levers for forimproving improving business business segment segmentreturns. returns. Disaggregates

Disaggregatescompany company performance: performance: Hints Hints and and Pitfalls Pitfalls Do: Do: Allows Allowsinformed informeddecision decisionabout aboutindividual individualbusiness businesssegments segments Take Takeinto intoaccount accountall allrelevant relevantplayers playerswhen whenassessing assessingsegment segmentprofitability profitability Dont: Dont: Data Data Sources Sources Companies Companiesfinancial financialstatements statements Case Case Examples Examples The The following following documents documents contain containgood good examples examples of ofbusiness/segment business/segmentprofitability profitability analysis analysis and output: and output: Related Related Analytics Analytics Business/segment Business/segmentattractiveness attractiveness Company/competitors Company/competitors comparison comparison Dawson DawsonInternational: International: London Londonproject projectarchive archive Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 203 - Profitability Stream Analytics Introduction Cost Structure Analysis Relative Cost Positioning Break-even Analysis Economies of Scale Experience Curve Price Elasticity Business/Unit Profitability

Conclusion DRAFT PROFITABILITY STREAMCONCLUSIONS Profitability stream: Conclusions The main focus of the profitability stream is often the building of an economic model: Helps predict and model future profitability, depending on strategic options generated (see A&D Kbase, Gemini Compass for further material). Often linked with an activity based costing analysis to understand true costs of products/customers (see Strategy Kbase, Gemini Compass for detailed material). Analytics detailed in this section are an excellent starting point to help understand the drivers of profitability: Providing valuable insight in themselves. But also as a starting point for a more detailed economic model. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 205 - Capabilities Stream Analytics Introduction Strength and Weaknesses Analysis Venkat Matrix Conclusions DRAFT ANALYTICS TO UNDERSTAND A CLIENTS STRATEGIC POSITION Capabilities Stream: Questions and Analytics Strategic Position What are the (economic) boundaries of the businesses the company is in? How are they changing? Capabilities Stream Strategic Questions Main Analytics What Whatare arethe theboundaries boundariesof ofthe the capabilities capabilitiesrequired requiredto tocompete compete successfully? successfully? Strengths Strengths and and Weaknesses Weaknesses How do companies create value in each of the businesses? How is this changing? How is the client company positioned relative to the competition to create value? How is it changing? What Whatcapabilities capabilitiesare arerequired requiredto to deliver delivervalue? value? How Howisisthis this changing? changing? Venkatramen Venkatramen Matrix Matrix How Howstrong strongare areour ourclients clientskey key capabilities capabilitiesrelative relativeto toits its competitors? competitors? Core Analytic Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm

- 207 - Capabilities Stream Analytics Introduction Strength and Weaknesses Analysis Venkat Matrix Conclusions DRAFT CAPABILITIES STREAMINTRODUCTION Capabilities stream analyticsintroduction Capabilities are bundles of expertise, technology and skills that are critical factors (i.e. differentiated) for current of future business success. There are two high level elements to a capabilities analysis: Identify Client Strengths and Weaknesses With respect to the competition That are/are not sustainable and leverageable in future That are potentially exportable (key for overseas/new market expansion) Establish Gaps in Capabilities Required for Future Strategic Options What to compete on What not to compete on Capabilities analysis can be done quick and dirty or in-depth, depending on time available: Trade-off comes in level of detail and number of surveys carried out. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 209 - DRAFT CAPABILITIES STREAMINTRODUCTION Capabilities analysishierarchy of capabilities Capabilities assessment can be conducted on several levels: Capabilities Hierarchy Level I: An aggregated level of up to 810 core capabilities that underpin a companys success and performance, but are not easily seen by the organisation or its customers (e.g. miniaturisation of Sony). Level II: A summarised number of capabilities (4070) that an organisation demonstrates across functional barriers that tend to be visible to the organisation and its customers (e.g. Virgins ability to leverage its brand, bringing new products to market). Level III: A large number (many thousands) of capabilities relating to individual employees skills (e.g. Telcos engineers ability to repair faults quickly). Core Organisation Individual Generally, Generally,we wefocus focuson onorganisational organisationalcapabilities. capabilities. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 210 - CAPABILITIES STREAMINTRODUCTION Geminis new change model defines capabilities at a number of levels a DRAFT The process of changeThe development of capabilities Capability Capability Dimensions Dimensions Environmental Intelligence Asset Management Process Alignment Client Client Issues Issues

Learning/ Innovation Individual Key Group Organisation Development Development Levels Levels Assessment Assessmentof ofcapability capabilityand anddesign designof ofchange changestrategies strategiesto todevelop developthese these will form a key element of our A&D approach. will form a key element of our A&D approach. a. See Geminis New Change Model, Tracker InnovL8Sep98Rpassr.ppt, on London Server. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 211 - Capabilities Stream Analytics Introduction Strength and Weaknesses Analysis Venkat Matrix Conclusions DRAFT CAPABILITIES STREAMCORE ANALYTICS Strengths and weaknesses analysisintroduction Why Why We We Use Use ItIt What What ItIt Is Is Identification Identificationof ofaaclients clientsstrengths strengthsand and weaknesses that impact its weaknesses that impact itsability abilityto to implement implementaastrategic strategicoption. option. Assess Assessstrengths strengthsand andweaknesses: weaknesses: Validates Validatesopportunities opportunitiesfor fordeveloping developingaacompany company Determines a strategic direction consistent Determines a strategic direction consistentwith: with: Companys Companyscapabilities capabilities Industry requirements Industry requirements With Withrespect respectto tothe

thecompetition competition That are/are not sustainable That are/are not sustainableand andleverageable leverageableinin the future the future That Thatare arepotential potentialexportable exportable(new (newmarket market expansion) expansion) Strengths Strengths & & Limitations Limitations Strengths: Strengths: Limitations: Limitations: Comprehensive Comprehensiveprocess process(depending (dependingon ontime timetaken takenfor for analysis) analysis) Can Canengage engageclient clientearly earlyon onininassignment assignmentwith withaafamiliar familiar topic topic Time-consuming Time-consumingprocess process Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 213 - DRAFT CAPABILITIES STREAMCORE ANALYTICS Strengths and weaknesses analysishow to do it Benchmark Benchmark Against Against External External Sources Sources Conduct Conduct Capabilities Capabilities Survey Survey Agree Agreewith withyour yourclient clientthe thedefinition definitionof of capabilities capabilities List Listcapabilities capabilitiesusing: using: Previous Previouscapabilities capabilitiesstudies studies Internal Internalsurvey surveyfor forclients clients Expert Expertstudies studies Etc. Etc. Test Testlist

liston onsample sampleof ofclient clientpersonnel personneland andrefine refine Conduct a survey: Conduct a survey: Choose Chooseexternal external constituents constituents(recognised (recognisedfor for their knowledge their knowledgeof ofthe the industry) industry) Identify Identifybest bestpractices practices against againstwhich whichyou youcan cantest test your yourclients clientscapabilities: capabilities: Ask Askinterviewees intervieweesto torank rank companys companysperformance performance against againstthese these Analyse Analyse Findings Findings Identify Identifycapabilities capabilitiesin inthe the required industry required industry Position Positionyour yourclient clienton onaa capabilities spectrum capabilities spectrum relative relativeto tocompetitors competitors Assess Assessgaps gaps Brainstorm Brainstormto todrive driveinsight insight Choose Choosegroup groupfor fordistribution: distribution: Ensure Ensureititisissignificant significantininterms termsof ofsize sizeand andscope scope Consider Considerbest bestuse/coverage use/coverageof: of: Focus interviews Focus interviews Postal/fax Postal/faxsurveys surveys Workshops Workshops Ask Askrespondents respondentsto

toassess assesscurrent currentand andfuture future importance importanceof ofthe thesurveyed surveyedcapabilities capabilitiesin inyour your industry: industry: Establish Establishranking rankingcategories categories Map Mapcapabilities capabilitiesonto ontothe thevalue valuechain, chain, differentiating: differentiating: Top Top10, 10,bottom bottom10 10 Most important Most important10, 10,least leastimportant important10 10 Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 214 - DRAFT CAPABILITIES STREAMCORE ANALYTICS Strengths and weaknesses analysishow to do it Analysis Process Choose Choose competitors competitorstoto compare compare Design Designcapabilities capabilitiessurvey survey Review Review analysis analysis regarding regarding capability capability identification identification Develop Developlist list of ofindustry industry capabilities capabilities Gemini Gemini industry industry experts experts develop develop capabilities capabilities along alongvalue value chain chain Selected Selected400 400 inincompany company Capabilities Capabilities validation: validation: questionnaire questionnaire (100 (100internal) internal) Interviews Interviewswith with top topmanagers managers

Internal Input List Listofof capabilities capabilities Conduct Conduct capabilities capabilities survey survey internally internallyand and externally externally Analyse Analyse capabilities capabilities survey surveyresults results Validate Validate results resultswith with strategy strategygroup group &&executive executive managers managers Validated Validated capabilities capabilities External Input Validation Validationby by strategy strategygroup group Gemini Gemini consultants consultants (who (whohave have worked workedon on similar similar projects) projects) Analysts, Analysts,head head hunters hunters&& journalists journalists Source: Gemini Consulting, C4 K.Base, Capabilities AnalysisA How to Guide, 1996. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 215 - DRAFT CAPABILITIES STREAMCORE ANALYTICS Strengths and weaknesses analysisillustrative output (1) XYZs Above-Average Capabilities Marketing Understanding client financial needs Understanding local markets (international) Managing brand image Pricing Communicating financial product offering Sales & Distribution Channel Management Product Development Developing innovative products Width / depth of the product range Designing bundles of products Repackaging existing products Corporate finance skills Execution & Control Size of the branch network Size of investor base

Local presence (international) Efficient salesforce Long-term oriented selling culture Consultative selling (including assets and liabilities, business and personal matters) Managing risk Trading global debt, equity, currencies Processing transactions Making OTC transactions Compliance Credit / underwriting skills Quote and brokerage information system Risk management system International communication network Equity and economic research Sales support system Leadership / People Development Identifying and exploiting new business opportunities Allocating resources to meet strategic objectives Managing External Relationships Ethical and trustworthy public image Building institutional relationships Managing government relations Managing professional advisors Funding and Financing Managing local funding Strong capital base Debt ratings Managing Information Recruiting & retaining talented people Managing incentives Training and managing the sales force Effective teamwork Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 216 - DRAFT CAPABILITIES STREAMCORE ANALYTICS Strengths and weaknesses analysisillustrative output (2) Overall Capabilities Summary Percentage of respondents Percent ofas respondents rating capability Good, Best rating capability as Good, in Industry World Class Bes t inorIndus. or World Cl ass Ac ross Indus . Across Industry Overall Capabilities Summary 100.00 100 STRONG Strong 90.00 90 Re se arc h & d e velo p me n t Tr aff ic cap a city m ana ge me n t 80.00 80 70 70.00 In flue n cing & lead ing in du str y stan dar ds F ixe d n e two r k pla nnin g & co nstr uc tio n M an ag in g la r ge v olum e s of t r ans a ctio n s Ma nag em e nt of f ie ld eng ine erin g fo rce La rge sc ale b ill pa yme n t & pr o ces s ing Ne t wor k de sig n (inc lu din g en vi sion in g f utu r e p la tfo rm nee d s) Ma na ging cor p or ate ima g e a nd pub l ic re la tion s L a rg e sca le pr oje ct ma nag em ent

Mo bile ne tw ork pla n. & c o nstr uctio n Re latio n ship a cco un t ma nag em ent U nde r sta nd in g & in flue n cing reg u la tors M ana ging q u ality n etw o rk o per a tion s co st e ff ecti ve ly 60.00 60 M a na gin g go vern m e nt r e lat io n s Cu st om er req ue st ha ndlin g Build in g se curit y into s yste m s D e sign ing s pecific a tion s f or e xt er nal supp l iers 50.00 50 M ana ging custo m e rs g loba l re qu ir em e nts Re m ot e n e twor k sur v eilla n ce & r ep ai r Co n tra ct ne go t iation Br an d m gm t. Volu me s ellin g Pricin g stra teg y U n der stan d ing o f hum an fac to rs Co mm u n icatin g th e sa le s of fer L eve ra g ing o f e xis ting n et wo rk func tiona lity to deve lop so lut ion s M a na ging re la tion sh ip s Pla t form & sys te ms integ ra tion with sup p lier s De m a nd f ore cas tin g Attra c ting & re tain in g p e op le De ve lop ing indu s. co nv e rge n ce off e ring s Bu ild ing & le ver agin g cu sto m er l oya lty T ra in ing , d e velo ping & ma n ag ing p eo ple C us tom is atio n & fl exib il ity of billing 40.00 40 D e sign ing u s er int e rfa ce s D at a m ana g em en t WEAK Da ta st ora ge & r etr ie va l C o mm ercia l & fin a ncia l acum en D e velo p ing CPE t o le v era ge pla tf orm fu nctio nality Weak 30.00 30 20.00 20 Ma na gi ng rel a tion s hips wi th oth e r d is trib uto rs Desig ning & de ve lop ing soft w are Com pe tit or und er sta n ding & de velop ing m ar ket resp on se M ana g ing loc a l de live ry in ov e rse a s m ar k ets Crea tivity/ inno vatio n Un d er stan ding the m a rke t d yna m ics o f the info . ind us tr y De ve lop in g & ac ting on s t rat eg ic v is ion Sp o ttin g mar ket tre n ds T ailor i ng & m ark e ting s oln s t o me e t sp e cific c u st. n eed s E stab lis hing & neg otia t ing m e rge r s, JV, allian ces & fr a nch is es U n der s tan di ng & an tici pat ing c u stom er ne e ds & b eha viou r s Pac ka ging con ten t in a cu st . or i ente d wa y U n de rst a ndin g & o p er ati ng in diff ere nt cu ltur es M otivat ing e m p loy ee s D at a us a ge & inte r pr eta t ion Co ntin uo u s le a rnin g & kn o wle d ge sh a ring C o nve r ting te ch no logy d eve lo pm en ts in to co m m erc ial ap plicat ions

Cro ss se lli ng o th e r pr od ucts t o exis ti ng c u sto me r s M a na gin g th e inte g r ation o f m e rg e rs, JV & al lian ce s Re tailin g Pr od u ct/se r vice p or tf olio m a nag eme n t D e cis ion m ak in g/ e mp o wer m e nt C r eat in g co nte nt Flex ib ility , a da p tab ili t y an d nim ble ne ss to c h ang e fo c us 10.00 10 0.00 0 Ge t ting new pr o du cts / sol u tions to ma rke t q u ickly BASIC So ur c e: In t er nal c apa b ilities surv e y b as ed on 171 re spo nses. LEADING E n trep re neu rsh ip SHAPING N ote : C ap ab ility is listed to th e righ t of th e dot. Source: Internal capabilities survey based on 171 responses. Note: Capability is listed to the right of the dot. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 217 - DRAFT CAPABILITIES STREAMCORE ANALYTICS Strengths and weaknesses analysistop tips Potential Potential Insights Insights Hints Hintsand and Pitfalls Pitfalls Highlights Highlightscapabilities capabilitiesnecessary necessaryto tobecome becomebest-in-class best-in-classplayer playerin inindustry: industry: Summarises Summarisesdiscrepancies discrepanciesbetween betweenexternal externaland andinternal internalviews views Summarises capabilities by section in value chain Summarises capabilities by section in value chain Groups Groupsstronger strongercapabilities capabilitiesto tohighlight highlightbusiness businessopportunities opportunities Do: Do: Spend Spendtime timebuilding buildingaasolid solidlist listof ofcapabilitiesit capabilitiesitprovides providesthe thebasis basisfor foraapowerful powerfulanalysis analysis Build a hypothesis of likely output before sending out the

survey (can be derived from Build a hypothesis of likely output before sending out the survey (can be derived fromanalyst analystreports) reports) Stick to a generic value chain when breaking down capabilities along it (unless the client has a Stick to a generic value chain when breaking down capabilities along it (unless the client has abroadly broadlyaccepted acceptedview viewof of its itsindustry industryand andits itsvalue valuechain) chain) Do Donot: not: Mistake Mistakecapabilities capabilitieswith: with: Record Recordofofachievements achievements Long Longlist listofofthe thebasics basicsnecessary necessarytotocompete competeininmarket market Summary Summaryof ofindividual individualstrengths strengths Data Data Sources Sources Gemini Interviews Geminiexperts experts Interviewswith withclients clientsand andcompetitors competitorsare areaakey keysource source Joint team/company executives Joint team/company executives Previous Previouscapabilities capabilitiesstudies studies SICC database on Lotus SICC database on LotusNotes Notes The Thefollowing followingprojects projectsare aregood goodexamples examplesof ofcapabilities capabilitiesanalysis analysis:: Abbey AbbeyNational National(Tamsen (TamsenWallis, Wallis,Penney PenneyFrohling) Frohling) BT BT(Tim (TimBradshaw) Bradshaw) Ericsson Ericsson Case

Case Example Example Related Related Analytics Analytics Key Keysuccess successfactors factorsand andindex indexof ofkey keysuccess successfactors factors VenKat VenKatMatrix Matrix See also London Shop training material on Build, Buy, Ally See also London Shop training material on Build, Buy, Allyoptions options (Gemini (GeminiCompass): Compass): Benchmarking Benchmarking Interviewing Interviewing Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 218 - Capabilities Stream Analytics Introduction Strength and Weaknesses Analysis Venkat Matrix Conclusions DRAFT CAPABILITIES STREAMCORE ANALYTICS Venkat matrixintroduction Why Why We We Use Use ItIt What What ItIt Is Is Helps Helpsidentify identifydifferentiating differentiatingversus versusparity parity capabilities on which client can capabilities on which client cancompete compete AAtool tooldeveloped developedby byProfessor ProfessorN. N. VenKatraman VenKatraman(Gemini (Geminifaculty) faculty) To Toidentify: identify: Helps Helpsprioritise prioritisewhat whatto todo dowith withkey keycapabilities capabilitiesfor for

strategic options strategic options Best-in-class Best-in-classcapabilities capabilities Parity Paritycapabilities capabilities Differentiating Differentiatingcapabilities capabilities Strengths Strengths & & Limitations Limitations Strengths: Strengths: Limitations: Limitations: Provides Providesfocus focuson onkey keycapabilities capabilitiesfor forstrategic strategicoptions options Engages client in implementation needs Engages client in implementation needs No Nomajor major Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 220 - DRAFT CAPABILITIES STREAMCORE ANALYTICS Venkat matrixhow to apply it Step 1 The Venkartraman Model Rank identified capabilities by: Strategic importance to future option: . . . to achieve competitive differentiation Support . . . to be in any business. Relative position (vis--vis competitors): Necessity . . . to be in business Stronger: best-in-class. Weaker: needs catching up. Profit Centre Support . . . to be in nay business Cost Centre Step 2 Investment Centre Pa Equal: as good as most. Differentiation Zone Zo ne Necessity . . . to be the business. Core rit y Core . . . to achieve competitive differentiation. Strategic Importance Relative Position Plot on Venkat matrix. Weaker Equal

Stronger (Needs catching up) (As good as most) (Best-in-class) Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 221 - DRAFT CAPABILITIES STREAMCORE ANALYTICS Venkat matrixillustrative output UK Mortgages Company Example Core Support . . . to be in nay business Product development Managing information Sales and distribution channel management Marketing Risk management/ control External relationships Profit Centre Zo ne . . . to be in business Leadership and people Differentiation Processing Investment development information/ customer service Zone Centre Pa ri t y Necessity Strategic Importance . . . to achieve competitive differentiation Funding and financing Cost Centre Relative Position Weaker Equal Stronger (Needs catching up) (As good as most) (Best-in-class) Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 222 - DRAFT CAPABILITIES STREAMCORE ANALYTICS Venkat matrixtop tips Potential Potential Insights Insights Best-in-class Best-in-classcore

corecapabilities capabilitiesallow allowus usto: to: Parity Parityzone zonecapabilities capabilitiesare: are: Reinvent Reinventrules, rules,generate generatesignificant significantrevenue revenueat athigh highmargins, margins,create createbarriers barriersto toentry/exit entry/exit Nonvalue-adding, Nonvalue-adding,business businessas asusual usualfunctionpotential functionpotentialtotooutsource outsourceor orget getrid ridofof Differentiating Differentiatingzone zonecapabilities capabilitiesare: are: Potential Potentialfocus focusfor forinvestment investment Hints Hintsand and Pitfalls Pitfalls Data Data Sources Sources Do: Do: Validate Validateall alldata datawith withclient client Run workshops to develop Run workshops to developand andvalidate validatematrix matrix Use expert resources to help develop options Use expert resources to help develop options Do Donot: not: Capabilities Capabilitiessurvey surveyanalysis analysis Analysts Analysts Industry Industryexperts experts Penney Frohling, Penney Frohling,VMS VMS340 3403374 3374 The Thefollowing followingare aregood goodcase caseexamples examples:: ABN ABNAMRO AMROGTS GTS Abbey

AbbeyNational Nationalexpansion expansionopportunities opportunities Case Case Example Example Related Related Analytics Analytics Strengths Strengthsand andweaknesses weaknessesanalytic analytic Build, buy, ally Build, buy, allyoptions options See Seealso alsoM&A/Alliances M&A/AlliancesCoE, CoE,Gemini GeminiCompass Compass Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 223 - Capabilities Stream Analytics Introduction Strength and Weaknesses Analysis Venkat Matrix Conclusions DRAFT CAPABILITIES STREAMCORE ANALYTICS Capabilities analysis streamconclusions Provides a vital insight to a companys ability to follow or implement a potential strategic option. Helps client prioritise and focus on key capabilities for strategic options. Is a key input to the option development and evaluation process: Options to fill capability gaps are often resource constrained. The chosen route to fill gaps, e.g. build, buy, ally has implications for time, cost and ease of implementation. Many clients overlook the importance of a capabilities analysisit is key to demonstrate implications for the chosen strategy. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 225 - Developing and Evaluating Options Introduction Segment Attractiveness Net Present Value Developing and Evaluating Options Introduction Segment Attractiveness Net Present Value DEVELOPING AND EVALUATING OPTIONSINTRODUCTION Developing strategic options is more of an art than a science DRAFT Option development is not prescriptive: It is heavily reliant on experience and expertise Creativity is required The process and solution is unique to each client: Dependent on the clients unique position and set of capabilities Scenario modelling and vision engineering can sometimes help generate options, but is not included in the scope of this toolkit: See strategy discipline Kbase, Gemini Compass There are no pure analytics to enable us to arrive at the answer (although tools do exist to help evaluate them).

There Thereare arehowever howeveraafew fewguidelines guidelinesto tohelp helpthe theprocess. process. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 228 - DRAFT DEVELOPING AND EVALUATING OPTIONSINTRODUCTION In developing options, there are some important factors to bear in mind Link Linkback backto tothe the initial issues initial issuesand and hypotheses in the hypotheses in the a APSP APSPa:: Do Dooptions optionsaddress address the clients the clients problem? problem? What Whatadditional additional options optionswould wouldhelp? help? Option Development and Evaluation Examine Examinethe the insights insightsand and answers answersfrom fromthe the analytics analytics performed: performed: What Whatspecific specific answers answershave havebeen been derived? derived? How Howisisthe theclients clients strategic strategicposition position impacted? impacted? How Howisisthis thislikely likelyto to change? change? Brainstorm Brainstorm(using (using experience experienceand and expertise) expertise)potential potential options optionsfor forhow howthe the client clientshould should position positionitself itselfin inthe the future

futurevis--vis: vis--vis: Industry Industrydynamics dynamics Competitors Competitors Customers Customers Factor-in Factor-inwhat what capabilities capabilitiesexist existto to implement the implement the proposed proposedoptions: options: What Whatare arethe thegaps? gaps? What would What wouldititcost cost to tofill fillgaps? gaps? Evaluate Evaluateoptions: options: Financially: Financially:are are hurdle hurdlerates ratesmet? met? Practically: Practically:what whatisis the theease/risk ease/riskof of implementation? implementation? II M M PP LL EE M M EE NN TT AA TT II OO NN a. Analytical Problem Solving Process: See Strategy Core Skills, GU Kbase, Gemini Compass. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 229 - DRAFT DEVELOPING AND EVALUATING OPTIONSINTRODUCTION Dependent on strategic position, there are eight generic options Generic Strategies Strategic Position Future Future attractiveness attractiveness Competitive Competitive position position Profitability Profitability 11 Invest Investin in segment segment and andgrow growmarket marketshare share 22

Improve Improve profitability profitability (lower (lowercosts, costs, increase increase price) price) 33 Hold Holdposition position and and grow grow ififpossible possible 44 Invest Investand andgrow grow market marketshare/sell share/sell Alliance Alliance or or JV JV 55 Increase Increase profitability/harvest profitability/harvest 66 Investigate Investigate new new technology technology and/or and/or capabilities capabilities to to gain gain market share market share 77 Hold Holdposition position for foras as long longas as possible possible 88 Harvest Harvestor orexit/avoid exit/avoid Future FuturePositioning Positioning (Industry (IndustryDynamics, Dynamics, Customer CustomerDemand) Demand) Key: = Favourable, = unfavourable In Ineach eachcase casewe

weneed needto toestablish establishwhether whetherthe thenecessary necessarycapabilities capabilitiescan can be developed. be developed. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 230 - DRAFT DEVELOPING AND EVALUATING OPTIONSINTRODUCTION New opportunities can be assessed in terms of capabilities and core business Total Solution / Capabilities Matrix Core Business Substantial investment in capabilities or Invest and grow Alliances and JVs Pursue if profitable in short term Non-Starter Non-Core Business Completely new capabilities Leveraging Existing Capabilities Completely new capabilities Source: R. Koch. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 231 - DEVELOPING AND EVALUATING OPTIONSINTRODUCTION There are some tools which supplement the stream analytics DRAFT Streama analytics will provide insight and answers to help understand a clients strategic position. Two tools however, help evaluate options: Segment attractiveness: helps quantify future attractiveness of options Net present value: helps quantify financial impact of options These Thesetools toolsare aredetailed detailedin inthis thissection. section. a. See competitor/industry, customer, cost, capabilities stream analytics section of tool kit. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 232 - Developing and Evaluating Options Introduction Segment Attractiveness Net Present Value DRAFT DEVELOPING AND EVALUATING OPTIONSCORE ANALYTICS Segment attractivenessintroduction Why Why We We Use Use ItIt What What ItIt Is Is Segment Segment attractiveness attractiveness assesses assesses the the benefits of being

in (or entering) a benefits of being in (or entering) a given given segment. segment. ItIt is is defined defined by by aa set set of of quantitative quantitative and and qualitative qualitative factors: factors: Each Each factor factor isis weighted weighted according according to to its its importance importance and and to to your your own own requirements. requirements. Segment Segment attractiveness attractiveness isis derived derived by by the sum of the factors. the sum of the factors. Although Although there there are are different different approaches for evaluating approaches for evaluating segment segment attractiveness, attractiveness, all all assess assess the the pitfalls pitfalls and opportunities of the segment and opportunities of the segment analysed. analysed. Help Helpmake make decisions decisions in in portfolio portfolio management: management: Identify where to invest/divest. Identify where to invest/divest. Provides Provides an an input inputto toevaluating evaluatingstrategic strategic options. options. Helps Helps quantify quantify future futureattractiveness attractiveness of of markets/segments. markets/segments. Strengths Strengths & & Limitations Limitations Strengths: Strengths: Provides Providesaa structure structure for for opportunities opportunitiesassessment.

assessment. Objective assessment. Objective assessment. Limitations: Limitations: Reliable Reliable data-driven data-driven analysis analysis isis time-consuming. time-consuming. ItIt isisqualitative, and vulnerable to qualitative, and vulnerable to poor poorjudgement. judgement. Does not factor in capabilities/ease implementation. Does not factor in capabilities/ease implementation. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 234 - DRAFT DEVELOPING AND EVALUATING OPTIONSCORE ANALYTICS Segment attractivenesshow to apply it On the basis of discussions with industry experts and JTMs, identify the factors that should be taken into account for a given segment, e.g.: Market size/market growth. Capacity/demand balance. Barriers to entry. Returns, NPV. Find a way to measure qualitative factors, and combine quantitative and qualitative factors in an index. Rate each factor from: 1 (very unattractive), to 5 (very attractive). This is not a trivial exercise. Requires expertise and validation to assign ratings. Multiply the ratings by weightings reflecting the factors relative importance. Calculate the total value for each dimension. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 235 - DRAFT DEVELOPING AND EVALUATING OPTIONSCORE ANALYTICS Segment attractivenessillustrative output Segment Evaluation Option A Factor Weight Score Value (Factor x Score) Overall market size 0.20 4 0.80 Predicted customer demand 0.20 5 1.00 Historical profit margin 0.15 4 0.60 Competitive intensity 0.15 2 0.30 Technological requirements 0.15 4 0.60 Inflationary vulnerability 0.05 3 0.15 Energy requirements 0.05

2 0.10 Environmental impact 0.05 5 0.15 Market Attractiveness Social/political/legal Must be acceptable 1.00 Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm Total 3.70 - 236 - DRAFT DEVELOPING AND EVALUATING OPTIONSCORE ANALYTICS Segment attractivenesstop tips Potential Potential Insights Insights Combined Combined with with an an analysis analysis of ofaa companys companys competitiveness competitivenessin ineach eachsegment, segment,itithelps helps decide decide how best to distribute financial and managerial resources between segments. how best to distribute financial and managerial resources between segments. Hints Hints and and Pitfalls Pitfalls Do: Do: Quantify Quantifyeach eachfactors. factors. Define the time Define the timeperiod periodbeing beingscored: scored: AAsegment segmentthat thatisisattractive attractivetoday todaymay maynot notremain remainso, so,and andvice viceversa. versa. Dont: Dont: Over Overengineer/make engineer/maketoo toocomplex complex Data Data Sources Sources Industry Industry reports reports Analysts Analysts reports reports

Industry Industry experts experts Client Clientinternal internaldata data Industry Industry associations associations Related Related Analytics Analytics Business/segment Business/segmentprofitability profitability Company/competitor Company/competitoranalysis analysis Capability Capability analysis analysis Cost Costanalysis analysis Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 237 - Developing and Evaluating Options Introduction Segment Attractiveness Net Present Value DRAFT DEVELOPING AND EVALUATING OPTIONSCORE ANALYTICS Net present valueintroduction Why Why We We Use Use ItIt What What ItIt Is Is AAtechnique techniqueto toevaluate evaluatean aninvestment investment decision (e.g. whether to decision (e.g. whether toinvest investx xm min inaanew new venture) venture) There Thereare areother othertechniques techniquesto toevaluate evaluate investment investmentdecisions, decisions,however howeverthey theyare are inferior inferiorto tothe thenet netpresent presentvalue valuetechnique: technique: To Tomake makedecisions decisionsin inwhether whetherto toinvest investin inparticular particular project: project: Part Partof ofprocess processto toevaluate evaluatestrategic

strategicoptions options Methodology Methodologycan canalso alsobe beapplied appliedto todetermine determinethe the value of: value of: A Acompany companyor orenterprise. enterprise. Part Partof ofaacompany companyor orenterprise enterprise(e.g. (e.g.part partof ofaabusiness businessto to be besold) sold) Interior Interiorrate rateof ofreturn return(IRR). (IRR). Payback. Payback. Average-return-on Average-return-onbook. book. The Thekey keystages stagesin indetermining determiningnet netpresent present value of a project are to: value of a project are to: Forecast Forecastcash cashflows flowsgenerated generatedby bythe theproject. project. Determine the opportunity cost of having Determine the opportunity cost of havingcapital capital tied tiedup upininthe theproject. project. Discount Discountthe thecash cashflows flowsto todetermine determinetheir theirpresent present value (PV), and value (PV), and Deduce Deducethe theprojects projectsinvestment investmentcost costto toget getthe thenet net present value (NPV) present value (NPV) IfIfthe theNPV NPVis isgreater greaterthan thanzero, zero,the

thecompany company should shouldinvest investin inthe theproject project Strengths Strengths & & Limitations Limitations Strengths: Strengths: Limitations: Limitations: The Themost mostcorrect correctand andrigorous rigorousmethodology methodologyto toevaluate evaluatean an investment investmentdecision decision Forecasting Forecastingcash cashflows flowsrequires requiresenormous enormouscare careand andskill, skill,and and may mayprove proveimpossible impossibleto toderive derivean anaccurate accurateresult result Some Someclients clientsare aremore morecomfortable comfortablewith withother othermethodologies methodologies (e.g. (e.g.payback) payback) Very Verysensitive sensitiveto tothe theterminal terminalvalue value Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 239 - DRAFT DEVELOPING AND EVALUATING OPTIONSCORE ANALYTICS Net present valuehow to apply it Step 1 1 Determining the Value of a Project Involves Six Steps 1 Define Define Time Time Period Period Determine Determine period period over over which which you you will will estimate estimate future future cash cash flows: flows: Forecast Period (years) 00 Flows Flows Estimate Estimate the the likely likely cash

cash flows flows beyond beyond the the forecast forecast period period 4 Determine Determine Determine Determine the rate rate at at which which you you will will discount discount future future cash cash flows flows to to derive derive their their present present value value Calculate 5 Calculate Calculate Calculate the the present present value value of of those those future future cash cash flows flows 6 Conduct Conduct Test Test the the sensitivity sensitivity of of the the present present value value to to key key assumptions assumptions Opportunity Opportunity Cost Cost Present Present Value Value & & Net Net Present Present Value Value Sensitivity Sensitivity Analysis Analysis 1 2 33 44 5 66 77 88 99 10 11-20 11-20 21-30 21-30 etc. etc. .. .. Forecast Forecast the the size size and and timing timing of of future future cash

cash flows flows Estimate 3 Estimate Terminal Terminal Value Value Estimate Estimate Terminal Terminal Value Value Today e.g. e.g. 33 years, years, 55 years, years, 10 10 years years 2 Forecast Forecast Cash Cash 3 Define Define Time Time Period Period 2 Forecast Forecast Cash Cash Flows Flows XX XX XX XX XX XX XX XX XX XX XX YY 6 Conduct Sensitivity Sensitivity Analysis 5 Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm Calculate Calculate Present Present Value Value 4 Determine Determine Discount Discount Rate Rate - 240 - DRAFT DEVELOPING AND EVALUATING OPTIONSCORE ANALYTICS Net present valuehow to apply it (cont.) Step 2 Determining the Value of a Company or Project Involves Six Steps 1 Define Define Time Time Period Period Flows Flows Terminal Terminal Value Value 4 Determine Determine Opportunity Opportunity Cost Cost

Cash Cash flow flow is is the the difference difference between between money money received received and money paid out: However, However, one one common common pitfall pitfall is is confusing confusing cash cash flow with accounting profit: they are not the same Accounting Accounting profit profit reflects reflects when when money money is is earned earned or or expensed, expensed, rather rather than than when the cash flows actually occur In In addition, addition, depreciation depreciation (which (which is is not not cash cash out) out) is is deducted deducted from from accounting accounting profits When When identifying identifying cash cash flows, flows, we we should should include include all all additional, additional, or or incremental cash flows that are generated from acceptance of the project incremental cash flows that are Forecasting Forecasting future future cash cash flows flows requires requires making multiple assumptions about future revenues (and sources about future revenues (and sources of of future future revenues) revenues) and and future future costs: costs: The The forecasts forecasts are are only only as as strong strong as as the the underlying underlying logic logic Forecasting Forecasting incremental incremental cash cash flows flows is is aa relatively relatively difficult difficult processwhich processwhich we we do do not not detail detail here: here: For For more

more information information on on how how to to do do itit see see data data source source p.xx p.xx the the key key areas areas to to look-out look-out for, for, however, however, are: are: Incremental Incremental (not (not average) average) cash cash flows flows Changes Changes in in working working capital capital Consistent Consistent treatment treatment of of inflation inflation Adjustments Adjustments for for depreciation depreciation Adjustments Adjustments for for taxes taxes Forecast Forecast the the size size and and timing timing of of future future cash cash flows flows Estimate Estimate the the likely likely cash cash flows flows beyond beyond the the forecast forecast period period Determine Determine the the rate rate at at which which you you will will discount discount future future cash cash flows flows to to derive derive their their present present value value Calculate 5 Calculate Calculate Calculate the the present present value value of of those those future future cash cash flows flows 6 Conduct Conduct Test Test the the sensitivity sensitivity of of the the present present value value to to key key assumptions assumptions Present Present Value

Value & & Net Net Present Present Value Value Sensitivity Sensitivity Analysis Analysis e.g. e.g. 33 years, years, 55 years, years, 10 10 years years 2 Forecast Forecast Cash Cash Estimate 3 Estimate Determine Determine period period over over which which you you will will estimate estimate future future cash cash flows: flows: Forecast Cash Flow Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 241 - DRAFT DEVELOPING AND EVALUATING OPTIONSCORE ANALYTICS Net present valuehow to apply it (cont.) Step 3 Determining the Value of a Company or Project Involves Six Steps 1 Define Define Time Time Period Period Determine Determine period period over over which which you you will will estimate estimate future future cash cash flows: flows: e.g. e.g. 33 years, years, 55 years, years, 10 10 years years 2 Forecast Forecast Cash Cash Flows Flows Estimate Estimate the the likely likely cash cash flows flows beyond beyond the the forecast forecast period period 4 Determine Determine Determine Determine the rate rate at at which which you you will will discount discount future future cash cash flows flows to to derive derive their

their present present value value Calculate 5 Calculate Calculate Calculate the the present present value value of of those those future future cash cash flows flows 6 Conduct Conduct Test Test the the sensitivity sensitivity of of the the present present value value to to key key assumptions assumptions Opportunity Opportunity Cost Cost Present Present Value Value & & Net Net Present Present Value Value Sensitivity Sensitivity Analysis Analysis The The terminal terminal value value is is the the value value of of the the project project beyond beyond the the forecast forecast period: Also known known as as the the residual residual value value For For example, example, the the anticipated anticipated project project could could be be launched into into aa new new market: market: The forecast period may be 5 years, However, we would would expect expect an an impact impact of of the the market market entry entry to to continue continue beyond those 5 years. The terminal value should reflect the financial impact beyond the 5 year forecast period To To determine determine the the terminal terminal value, value, you you would would review review the planned project, project, and anticipate the

likely cash flows generated and anticipate the likely cash flows generated from from that that project project Typically Typically there there are are 22 principal principal ways ways to estimate the terminal value: Assume small incremental cash small incremental cash flow flow out over a long period (10-20 years) Assume incremental cash flows tail off to zero (over 5-10-15 years) Forecast Forecast the the size size and and timing timing of of future future cash cash flows flows Estimate 3 Estimate Terminal Terminal Value Value Estimate Terminal Value Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 242 - DRAFT DEVELOPING AND EVALUATING OPTIONSCORE ANALYTICS Net present valuehow to apply it (cont.) Step 4 Determining the Value of a Company or Project Involves Six Steps 1 Define Define Time Time Period Period Flows Flows Terminal Terminal Value Value 4 Determine Determine Opportunity Opportunity Cost Cost Estimate Estimate the the likely likely cash cash flows flows beyond beyond the the forecast forecast period period The The discount discount rate rate should should reflect: reflect: The The time time value value of of money money (i.e. (i.e. 1 1 in in 10 years from from today today is is not not worth worth as as much much as as 1 1 today);

today); and and The The risk risk involved involved in the particular particular project project being being considered. considered. To To determine determine the the discount discount rate rate we we calculate calculate the the weighted weighted average average cost cost of of capital capital (WACC) (WACC) of of the the firm: firm: D E WACC X rD + X rE WACC == V V Determine Determine the the rate rate at at which which you you will will discount discount future future cash cash flows flows to to derive derive their their present present value value Calculate Calculate the the present present value value of of those those future future cash cash flows flows 6 Conduct Conduct Test Test the the sensitivity sensitivity of of the present present value value to to key key assumptions assumptions Present Present Value Value & & Net Net Present Present Value Value Forecast Forecast the the size size and and timing timing of of future future cash cash flows flows Calculate 5 Calculate Sensitivity Sensitivity Analysis

Analysis Determine Discount Rate e.g. e.g. 33 years, years, 55 years, years, 10 10 years years 2 Forecast Forecast Cash Cash Estimate 3 Estimate Determine Determine period period over over which which you you will will estimate estimate future future cash cash flows: flows: Where: D = Outstanding debt E = Number of share x share price (Equity) V = D+E rD = Current borrowing rate rE = Expected return on equity The The hard hard part part is to estimate estimate rEE.. Use Use client client guidance guidance Use Use Fruhan Fruhan matrix matrix Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 243 - DRAFT DEVELOPING AND EVALUATING OPTIONSCORE ANALYTICS Net present valuehow to apply it (cont.) Step 5 Determining the value of a company or project involves six steps 1 Define Define Time Time Period Period Flows Flows Terminal Terminal Value Value Forecast Forecast the the size size and and timing timing of of future future cash cash flows flows Where: r = rate of return (or opportunity cost) C1 = expected pay-off at time period 1 Estimate Estimate the the likely likely cash cash flows flows beyond beyond the the forecast forecast period period Determine Determine the the rate rate at at which which you you will

will discount discount future future cash cash flows flows to to derive derive their their present present value value Calculate 5 Calculate Calculate Calculate the the present present value value of of those those future future cash cash flows flows Opportunity Opportunity Cost Cost Present Present Value Value & & Net Net Present Present Value Value Sensitivity Sensitivity Analysis Analysis To To calculate calculate PV PV apply apply the the following following formula: formula: PV = discount factor x C1 1 =X 1+r X C1 4 Determine Determine 6 Conduct Conduct e.g. e.g. 33 years, years, 55 years, years, 10 10 years years 2 Forecast Forecast Cash Cash Estimate 3 Estimate Determine Determine period period over over which which you you will will estimate estimate future future cash cash flows: flows: Calculate Present Value and Net Present Value NPV = PV-required investment C1 NPV = C0 + 1+r Where C0 = Cash flow at time period 0 Test Test the the sensitivity sensitivity of of the present present value value to to key key assumptions assumptions To To calculate calculate NPV apply the following

formula: formula: If If the the NPV is is less less than than zero, zero, the the project project should should not not go go ahead: ahead: ItIt will will destroy destroy value value If If the the NPV is is greater greater than than zero, zero, the the project project should should go go ahead ahead Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 244 - DRAFT DEVELOPING AND EVALUATING OPTIONSCORE ANALYTICS Net present valuehow to apply it (cont.) Step 6 Determining the value of a company or project involves six steps 1 Define Define Time Time Period Period e.g. e.g. 33 years, years, 55 years, years, 10 10 years years 2 Forecast Forecast Cash Cash Flows Flows Estimate 3 Estimate Terminal Terminal Value Value 4 Determine Determine Present Present Value Value & & Net Net Present Present Value Value 6 Conduct Conduct Sensitivity Sensitivity Analysis Analysis Conduct Sensitivity Analysis Forecast Forecast the the size size and and timing timing of of future future cash cash flows flows Estimate

Estimate the the likely likely cash cash flows flows beyond beyond the the forecast forecast period period Opportunity Opportunity Cost Cost Calculate 5 Calculate Determine Determine period period over over which which you you will will estimate estimate future future cash cash flows: flows: Determine Determine the the rate rate at at which which you you will will discount discount future future cash cash flows flows to to derive derive their their present present value value Calculate Calculate the the present present value value of of those those future future cash cash flows: flows: Formula Formula Test Test the the sensitivity sensitivity of of the present present value value to to key key assumptions assumptions Sensitivity Sensitivity analysis analysis is simply testing how how sensitive sensitive the the final final result result (i.e. the NPV NPV value) value) is is to to key key assumptions assumptions To To run run a sensitivity sensitivity analysis, one-by-one change change each each key key assumption assumption by by see 5% (or (or 10%, 10%, or or 15%), 15%), and and capture the revised revised NPV NPV This This should should identify

identify two two things: things: The The impact impact of of being being 5-10-15% 5-10-15% out out on on forecasts forecasts underlying underlying those those key key assumptions; assumptions; and and Which Which are are the the key key assumptions assumptions that that influence influence the the NPV output You You should should ensure ensure that that these these most most influential influential assumptions assumptions are are robust, robust, and and are are fully fully validated validated Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 245 - DRAFT DEVELOPING AND EVALUATING OPTIONSCORE ANALYTICS Net present valueconclusions Although we have focused here on applying net present value to investment projects, the methodology can also be applied to: Value entire companies. Value parts of businesses. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 246 - Next Steps and Feedback Process DRAFT NEXT STEPS The key next step is to validate this toolkit with the whole strategy discipline Toolkit Development Process 1998 May Jun Jul Aug 1999 Sept Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Version 3 release Toolkit Development Discipline/Global Validation Beta Version Release builds Feedback and

New material identified Version 2.0 Release Ongoing input Develop training modules CD Rom based Preliminary in-country validation Nordic Ge F SA UK We Wehave havealready alreadyidentified identifiedsome someareas areasfor forcontinued continueddevelopment. development. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 248 - DRAFT NEXT STEPS There are two areas of validation and input required from the discipline Next Steps and Ongoing Activities Builds and Comments on Existing Material Material to fill existing gaps: Collate global/regional contacts Good/better Good/better illustrative output References References to documents documents containing containing good good case case study study examples Missing tools Input to Ongoing Activities Who Who to to go go to to for for advice advice on on core core analytics analytics Develop analytics training modules Identify material for missing/new content/tools: Risk Risk management management Pricing Pricing strategy strategy Scenario Scenario modelling modelling Personal hints and tips not included Other general thoughts Develop A&D discipline overlap Refine approach to strategy (Discipline Heads working session required) Develop corporate level analytics section Incorporate toolkit into induction training The Theexpectation expectationis isto toprovide provideinput inputand andevolve evolvethe thetoolkit toolkiton onan anongoing ongoingbasis basis a Feedback Form is included. a Feedback Form is included. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 249 - DRAFT

NEXT STEPS Please direct any queries or feedback to your local toolkit contact . . . Global Strategy Analytics ToolkitLocal Contacts Nordic: Nordic: P. P. Cassel Cassel 354 0028 354 0028 US: M. TBD US:US: US: M. Hopkins Hopkins TBD 285 4673 285 4673 UK: UK: M. M. Miles Miles 340 340 3417 3417 Benelux: Ben: TBD Kamp Benelux: Ben: N. N. TBD Kamp 340 5139 340 5139 Iberia: Iberia:G. Reis Iberia: G.TBD Reis 340 1098 340 1098 France: France: C. C. Feuillette Feuillette 441 4353 441 4353 Ge: Ge: J. J. Heydecke Heydecke 149 1263 149 1263 It: It: TBD TBD Global GlobalSponsors Sponsors David David Barrett Barrett Jyrki JyrkiVeranen Veranen Asia: Asia: TBD TBD SA: SA: C. C. Filmer Filmer 280 6104 280

6104 ......or orsend sendthe theFeedback FeedbackForm Form(overleaf) (overleaf)to toLaura LauraKing. King. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 250 - DRAFT NEXT STEPS Global Strategy Toolkit: Feedback Form Name: Office: VMS: Comments/Builds/New Material: Page Ref/N (if relevant) E-mail E-mailor orfax faxto toLaura LauraKing: King:Fax Fax++44 44(0)171 (0)171340 3403400, 3400,VMS: VMS:340 3403054. 3054. Gemini Consulting Limited Proprietary and Confidential StratL21Oct98Rpmmdm - 251 -

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