Diversification "out of the box" - Roland Berger

Diversification "out of the box"Munich, October, 2008

ContentsPageA. Our approach – A structured concept based on four building blocks 4B. Portfolio transparency – Bringing existing businesses to target performance 6C. Portfolio management – Reshaping the portfolio (invest, divest) 18D. Role of the center – Matching organization and processes with portfolio logic 36E. Roland Berger – Our experience 49© 2008 Roland Berger Strategy Consultants GmbH 2

A. OUR APPROACH –A structured concept based on four building blocksRoland_Berger_Diversification_out_of_box_20090907.PPTX3

Some few care questions regarding diversification can beobservedDIVERSIFIED COMPANIESFOCUSED COMPANIES> Where to optimally invest – allocatingmoney to existing i or entering newbusinesses?> Which businesses should potentially bedivested?d?> What is the right "role of the center" andhow to avoid a "conglomerate discount"??> What could be adjacent growth options,strengthening the current business?> What are strategic options if furthergrowth in core business or adjacentbusinesses is limited or even at risk?4

Our modular approach consists of four building blocks –applicable for both diversified and still focused companies1Portfolio transparency 3 Role of the center 4 Implementation> Conduct bottom-up portfoliosegmentation> Achieve portfolio transparency> Definecore businesses> Review portfolio elements "target performance"and derive initiatives(profitability/growth measures)2 Portfolio management> Derive portfolio logic> Conduct valuation and identifydivestment candidates> Search for growth options (organic,inorganic)> Get agreement from share- andstakeholders> Review of "role of thecenter" (incl. costbenchmarks vs. otherholdings)> Development ofcornerstones for futuregroup organization> Blueprint and roughdimensioning of holdingfunctions (andmanagement processes)> Set-up of implementationplan– Responsibilities– Tasks, Milestones, andTimelines> Develop communicationconcept (internal, capitalmarkets)> Prepare of board meetingfor decisioniSource: Roland Berger5

B. PORTFOLIO TRANSPARENCY –Bringing i existing businesses to target t performanceRoland_Berger_Diversification_out_of_box_20090907.PPTX6

Our modular approach consists of four building blocks:Portfolio transparency1 Portfolio transparency 3 Role of the center 4 Implementation1.11.21.31.4Conduct bottom-up portfoliosegmentationAchieve portfolio transparencyDefine core businessesReview portfolio elements "targetperformance" and derive initiatives(profitability/growth measures)2 Portfolio management> Derive portfolio logic> Conduct valuation and identifydivestment candidates> Search for growth options (organic,inorganic)> Get agreement from share- andstakeholders> Review of "role of thecenter" (incl. costbenchmarks vs. otherholdings)> Development ofcornerstones for futuregroup organization> Blueprint and roughdimensioning of holdingfunctions (andmanagement processes)> Set-up of implementationplan– Responsibilities– Tasks, Milestones, andTimelines> Develop communicationconcept (internal, capitalmarkets)> Prepare of board meetingfor decisioniSource: Roland Berger7

In most companies, the organization of business units doesn'tfollow a "true market logic"Illustrative examplesConstructionCoUtilityCoHighTechCoDoors> Entry doors> Garage doorsGarageDoor openers…PowerPowerPower retailgeneration transmission &distributionTouring qualitymicrophones &speakers…> Are entry andgarage doorsreally onebusiness?> Shouldn'tgarage doorsopenersmanagedtogether withgarage doors?> Is transmission & distribution anown business?> What is the right regional marketdefinition for generation? (does itmake sense to expandgeographically?)> Is it possible tosell electricitywithout owngenerationcapacities?> Are speakers &microphonesreally onbusiness, onlybecause ofsimilardistributionchannels? ca esA bottom-up portfolio segmentation is needed to understand businesscompetitive position and to derive right strategic insights8

1.1A proper bottom-up portfolio segmentation is the first step toachieve portfolio transparencyHighCostSharingLowOne portfolio element(synergies might allowfor outpacing strategy)Related, but separate portfolioelements (synergies can lead tocost leadership)LowUnrelated portfolio elementsCustomer SharingOne portfolio elementRelated, butseparateportfolioelements(might bebundled)One portfolioelement(products mightsubstitute eachother)HighIn additionREGIONALSCOPE OFBUSINESS tobe analyzedPortfolio segmentation should mirror boundaries of thebattlefield within which companies compete at the market9

1.1 EXAMPLESThe correct portfolio segmentation can lead to insights, whilstincorrect segmentation can result in serious consequencesINSIGHTS FROMCORRECT PORTFOLIO SEGMENTATIONSTRATEGIC> Should we buy or sell the attractive business?> Should we expand into new geographies?> Are we vulnerable to low cost countries?> Should we vertically integrate into growingdownstream/upstream?> Can we exit a business without weakening the corebusiness?> Do we have to grow through M&A to be successful inthe future?OPERATIONAL> Should we drop this product line?> Should we merge our salesforce?> How should we plan our manufacturing footprint?> Should we centralize our activities to achieve higherscale? (e.g. distribution centers; salesforce)STRATEGIC CONSEQUENCES OFINCORRECT PORTFOLIO SEGMENTATIONCUSTOMERS> Neglect profitable customer segments or over-investin unprofitable customers> Give away opportunities to capture synergies> Misjudge relevant trends> Overlook relevant geographiesCOSTS> Induce unnecessary costs> Give away opportunities to capture synergies> Do not transfer experience> Under invest in important R&D initiativesCOMPETITORS> Overlook threats from competition> Miscalculate "real market share" (as proxy for scale andachievable profits)> Set inappropriate targets> Overlook relevant capacity changes in the industry> Misjudge true cost position10

1.1BACKUPWrong business definition can result in major strategic failuresCOMPANYCORE DEFINITION MISTAKEOUTCOMETOO NA ARROWTOO BROAD> Polaroid defined it's core aschemical/paper based processing andmissed the broader definition of imagecapture in the digital age> American Express believed charge cardsand credit cards were separatebusinesses. Charge card division lostmoney due to poor cost position and failedmarketing strategyt> Gillette viewed its core as "checkoutpurchases" and thus diversified intobatteries (Duracell) and writing instrumentst(Parker)> Saatchi viewed advertising and consultingas one business; failed to transferexpertise and suffered from lack of focus> Went Bankrupt in 2001> 50% drop in market value(1986-1991)> Stock price reduced by greater than 50%(1998-2001)> Company suffered severe losses due toinability to transfer experience, lack offocus, and tainted imageSource: Roland Berger11

1.2 EXAMPLEThe analysis of properly segmented portfolios can be based on"market attractiveness" and "competitive position"Project exampleSTRATEGIC IMPERATIVESMarketattractiveness> Market size> Market growth> Marketprofitability54321DalcombankTS-RetailBinnofarmMBRDSitronicsSistema-HalsMedsi/Medsi-2MTTMTSDetskiy Mir/DM CenterSky LinkRussian World StudiosIntouristConcern RTI SystemsSistema mass-mediaComstar OTC/MGTS> Top position: Furtherinvest in businesses (andgrow in related areas)> Borderliner: Bring tostrategic and/or operational"target performance" andmove to top pp position (e.g.increase market share tosustainable size by M&A,restructure operations)00 1 2 3 4 5> Weak position: Divest (orperform "leap frog")Top positionBorderlinerWeak position> Relative market shareCompetitive position> Relative performance (e.g. ROCE/ROS vs. competitors)> Performance vs. key purchasing factorsSource: Roland Berger Project example12

1.3 EXAMPLEThe definition of core business and "satellites" should bebased on a sharing analysis (and size/ financial performance)Project example (Related Diversification)RELATEDNESS ANALYSISCORE DEFINITIONCapability sharingCost sharingCustomer sharingABCDA B CA 100% 8% 5%BA 8% B 100% C 13%DA C100% 5% 8% 13% 5% 100% 10%B A D 8% B 10% 100% C 60% 13% D 80% 50%C100% 5% 8% 13% 5% 100% 10% 80%D8% 10% 100% 60% 13% 80% 50%100%5% 13% 100% 80%10% 60% 80% 100%D10%50%80%100%"UnrelatedBusinesses"PackagingProcessingConsumerBusinessProjectBusinessPro-fessionalRelatedBusinessesCoreBusinesses> Assessment of relatedness of businessesby using three main criteria (andrespective sub-criteria)> Calculation of "economic relatedness" asweighted average of criteriaMROAutomotiveElectronicsDetailed input for concrete synergies measuresPortfolio logic with indication for "role of the center"Source: Project example13

1.4ILLUSTRATIVEBefore deciding on portfolio changes, the future "targetperformance" has to be evaluatedPoint of DepartureTarget performanceMarketMarketattractivenessattractiveness5 544332211 2 3 4 5211 2 3 4 5Competitive positionCompetitive positionCore revenuesNon-core revenuesSource: Roland Berger14

1.4ILLUSTRATIVEPortfolio options should be based on "target performance"assessmentProject exampleIllustrativetarget performance PortfolioOptions"Optimize Status Quo""Focus on regionalexpansion""Focus on winningbusinesses""Other strategicoptions"High-level analysis of keyimplicationsStrategic> Portfolio implications> Market position?Financially> Revenues> EBIT> Investment needsInvestors' storyline> Shareholders> Analysts, Press, etc.Likelihood of option success> What do we have to believe for each option?> How likely is that?> Discontinuities to influence?Source: Roland Berger15

1.4To capture the "target performance" per business, four majorbuilding blocks have to be analyzedValue driversStrategicOperationalOrganizationalFinancial> Do we have the rightscale? How do we> Are we maximisingour revenues? e.g.build it?– Customer> Who is the bestsegmentation‘parent’ for activities – Product designwe undertake? – Deliveryexcellence> Are we minimisingour costs?> Are we measuringourselves effectively?> Do we have the rightcapabilities?> Is it clear who makesdecisions?> Do we have a highperformanceculture?> Are we valued andpriced appropriately?> Can we increaseworking capital andcash flow?> Is the balance sheetoptimized?> How efficient is ouruse of capital?Source: Roland Berger16

1.4ILLUSTRATIVETop-down targets for strategic and operational "targetperformance" can be derived from ROS/RMS analysisROS/RMS – IllustrativeReturns earned (ROS)HighLowCost of capitalSubscale(below strategictargetperformance)Restructuring case(below target performance)ClientCo businesseswith sustainablerelative market share(local, regional)?ClientCo businessesat operational targetperformance?LowRelative market share (RMS)HighSource: Roland Berger17

C. PORTFOLIO MANAGEMENT – Reshaping the portfolioRoland_Berger_Diversification_out_of_box_20090907.PPTX18

Our modular approach consists of four building blocks:Portfolio management1Portfolio transparency> Conduct bottom-up portfoliosegmentation> Achieve portfolio transparency> Definecore businesses> Review portfolio elements "target performance"and derive initiatives(profitability/growth measures)2 Portfolio management2.1 Derive portfolio logic2.2Conduct valuation and identifydivestment candidates2.3 Search for growth options (organic,inorganic)> Get agreement from share- andstakeholders3 Role of the center 4 Implementation> Review of "role of thecenter" (incl. costbenchmarks vs. otherholdings)> Development ofcornerstones for futuregroup organization> Blueprint and roughdimensioning of holdingfunctions (andmanagement processes)> Set-up of implementationplan– Responsibilities– Tasks, Milestones, andTimelines> Develop communicationconcept (internal, capitalmarkets)> Prepare of board meetingfor decisioniSource: Roland Berger19

2.1EXAMPLEThe overall portfolio logic is the most crucial question forClientCo managementPORTFOLIO LOGICQuestion for ClientCo (outside-in)RiskSynergyFocused vs. diversifiedRelated vs. Unrelated businesses 1)> How to reduce dependency onXY businesses? (if needed)Vl Value chain hi Production vs. services> How to position ClientCo("related diversifier" vs.Products Commodity vs. niche/specialists"conglomerate") ?LifecycleRegionsOtherMature vs. emerging industriesiRussia vs. emerging countries vs. world> How does the technologybusiness unit fit in the portfolio(production vs. services)?Potential for the holding to contribute value1) Related business to achieve synergies between portfolio elements due to high customer, cost, capability sharingSource: Roland Berger20

2.1BACKUPThe portfolio logic need to be evaluated on a detailed basis toavoid value destructionVivendi – The synergy dream"(We will be) the world's preferred creator and provider ofpersonalized information, entertainment and services to consumersanywhere, at any time and across all distribution platforms andservices."Jean-Marie Messier, then CEO, Vivendi Universal, April 2001"You need to look at (Vivendi Universal) as the General Electric ofentertainment – then it is a beautiful company. If, on top of that,you create the convergence, then it is even more beautiful. Buteven if we fail, you still have GE."Dennis Olivennes, Deputy of Canal Plus, April 2001Vivendi – Refocusing to Telco & Media"Contrary to what was hoped for and what was proclaimed, Vivendihas no significant synergies between its components. […] IfJean-Marie Messier had remained chief executive, Vivendi Universalwould have declared itself insolvent within 10 days."Jean-Rene Fourtou, CEO, Vivendi Universal, May 2003"… there never was a business model of the future hidden amongVivendi's disparate holdings. The assets assembled by Mr. Messierwere a grab-bag, nothing more."Manager's Journal, Wall Street Journal, May 2003Share price 31.12.98-31.12.02 vs. index [%] Share price 31.12.02-29.08.08 vs. index [%]VIV: 172SBF: 81 SBF: 151VIV: 21Source: Roland Berger, Press research, Thompson financial21

2.1PROJECT APPROACHThe definition of the future portfolio logic should be elaboratedin close collaboration with the ClientCo top-managementInteractive development of future portfolio logicInput from "as is" analysis> Understanding of current businessesperformance and their "target tperformance" (strategic, operative,financial)> Analysis of relatedness (synergies,similarity of success factor) betweenbusinesses and "core definition"> Description of ClientCo strength andassets– Operations/USP– HoldingCooperation with ClientCo Top-ManagementExpert interviews to challenge results and test/derivehypothesesWorkshop with Top-Management to agree on futureportfolio logicSource: Roland Berger22

2.2ILLUSTRATIVEThe arithmetic for valuation of portfolio elements has to beagreed with ClientCo management at the beginning of the projectBusiness unit profitability+ EBIT"Pearls"Increased valueROCE > WACC > 0Profitability ofcapitalROCEDeviation vs.risk adjustedmarketprofitabilitySpreadROCE - WACCCapitalEmployedCE"Underperformers"–Decreased valueROCE < WACC < 0Risk adjustmentTotal cost of capitalWACCSource: Roland Berger23

2.2ILLUSTRATIVEAfter defining the portfolio logic, the actual businesses have tobe evaluated "strategically"Value based portfolio (status quo)Deviation vs.risk adjustedmarketprofitability+–Hold without further investmentsFinance futrher growth(Divest if good deal)DivestLowBubble size = invested capital (assets)BU 7e.g.: Are significant additionalinvestments required to keepgood profitability?e.g.: Does this business havea sustainable relative marketshare?BU 3 BU 2BU 6e.g.: Who would be abetter corporateparent?BU 1Fit to portfolio logicBU 4e.g.: What are additionaladjacent growthopportunities?Restructure or exitBU 5"Pearls"e.g.: What are (additional)initiatives) to reach operationaltarget performanceHigh"Underperformer"Source: Roland Berger24

2.2EXAMPLE"Underperformer" businesses have to checked for future"target performance" before final decisionValue based portfolio (underperformer businesses only)HighValue creationopportunities withinbusiness(bring businesses toDRESSING UP &PREPAREFOR SALEMANAGE FORMAXIMUM VALUE(RESTRUCTURE)"target performance") DISINVEST RAPIDLY PREPAREFOR SALELowLowFit to portfolio logicHighSource: Roland Berger25

2.3Growth options: Different approaches have to be chosendepending on agreed portfolio logicRELATED DIVERSIFICATIONUNRELATED DIVERSIFICATIONNew geographiesNewdistributionchannelsNew products/servicesCurrentcoreNew partsof value chainNewbusinessesNewcustomersegmentsFirstSelectionIndustryfunnelSegmentanalysisIdentification of potential growth areas> Brainstorming> Idea tree> Horizontal/ verticalintegration> Opportunities in themarketPrioritization of industries> Coherence withdiversification goals> Profitability> Synergies (tbd)> "Fit"> "Success stories"> Activities of stakeholders> Trend-Analyses> etc> Reasons for exclusion– Moral, Ethics, Politics– Controllability(Technology Mgmt.)– Ownership structure & sizeDefinition for "deep dive" segments> Market attractivenessti > Market barriers> Competitive landscape > Cost of market entry> Threats (e.g. substitution) > etcPotential ti targetst26"Starting search from core""Funneling attractive opportunities"Source: Roland Berger26

2.3RELATED DIVERSIFICATIONIdentifying businesses for successful related diversificationrequires a methodical approachBuild factbase to support decision makingAssess strengthof coreIdentify full setof opportunitiesPrioritizeopportunitiesDevelop entrystrategy> Assess the strength > Identify and map theof core business and full set of businessesidentify opportunitiesrelated toto reinforce the core existing corebusinessbusiness(es)> Determine whichopportunities aremost attractive topursue– Evaluate odds ofsuccess (relatednessto corebusiness, abilityto differentiate)– Assessattractiveness> Within targetbusinesses,determine bestgrowth themes,potentialacquisition targets,and organicopportunities> Organize forsuccess2727

2.3 RELATED DIVERSIFICATIONThe growth spider can help to identify further opportunitiesClient exampleStorageTechnologyInertIngredientsMaterialsRetortablePreserved& StableChilledAsepticTetraPouchTetraManyTetraBrikTetraClassicPackageTypesValuePortionValueFamilyPremiumFamilyCustomerSegmentsPremiumPortionOther LineEquipmentValue ChainPlasticFilmProductContentsPlasticClosuresSBMPreformsPlastic Paper-PackagingBottle BoardCreamSwedenMilkNorthernEuropeValue Added SouthernDairyEuropeJuiceOther StillEarly AsiaFood &BeerBeveragesCarbonatedDrinksMilkProcessingLatinAmericaUSACheeseProcessingChinaFactoryManagementGeographySource: Roland Berger28

2.3RELATED DIVERSIFICATIONOdds of success for related diversification decrease withhigher distance to coreSharedcustomersSharedcostsSharedchannelsSharedcompetitorsSharedcapabilities/technologyCoreOdds of success1 stepdiversification2 stepdiversification3 stepdiversificationUnrelated"stand alone"PRIMARYDIMENSIONSFull share Partial share No shareSource: Roland Berger29

2.3RELATED DIVERSIFICATIONDistance to core needs to be defined properlyCRITERIACustomersharingCostsharingCapabilitysharingChannelsharing (tbd)CompetitorsharingDEFINITION> Percentage of > Percentage of the > Extent to which the > Percentage of > Percentage ofincrementalrevenue generatedfrom existingcustomer basenew cost base thatlends itself tosharing with theexisting businesstarget businessutilises existingtechnology andbusiness modelsadditional revenuegenerated throughexisting channelplayersincremental newmarket made up ofexisting competi-tors (excludingshare held byentrant)0-20% 0-5% No technology orbusiness model0-20% 0-20%21-40%5-15%overlap21-40%21-40%41-60%16-25%41-60%41-60%61-80% 26-35% Same technology 61-80% 61-80%and businesses81-100% >36% models81-100% 81-100%CRITERIAWEIGHTING1.00 1.00 1.000.50 0.75Source: Roland Berger30

2.3RELATED DIVERSIFICATIONIdentified growth opportunities can be prioritized by analysis ofmarket attractiveness and odds of successCase example5Marketattractiveness> Size> Growth> ProfitabilityRecommended focusof further analysis4321Medical/wound careInternalmedicalSpecialtybandagesExternal medicalCompositesIndustrial tapes (specialty)Decorative industrial flooring1 2 3 4 5Odds of success> Relatedness to core business> Competitive dynamics (e.g. share of Top 3 players)> Ability to differentiate (vs. competitors)EUR 500 mmarket sizeSource: Roland Berger31

2.3RELATED DIVERSIFICATIONIf related growth options are restricted, the search has to beconducted more "broadly"Untapped platforms> Yet less developed adjacentbusinesses> Step-motherly treatedproducts (in dynamicmarkets)Neglected customer assets> Unrecognized customersegments> Privileged access or trust fromcertain customer groups (e.g.strong brand image)> Unused data and informationDisregarded capabilities> Hidden corporate capabilities(e.g. growth from sharedservices)> Non-core capabilities in thebusinesses with high value tocustomers (today, future)Identification of assets, which currently do not drive growth,but may enable growth in so far unrecognized businessesSource: Roland Berger32

2.3RELATED DIVERSIFICATIONIndicators for growth potentials beyond the core business canbe identified along three dimensionsUntapped platformsNeglected customer assetsDisregarded capabilities> Robust leadership positionin a niche segment (nomatter of size)> Unusual success despitelow attention> New emerging customersegments (with attractive profitpool)> Historic, i but "forgotten""customer segments> Opportunity to bring a corecapability to the next level(e.g. to become a "marketmaker")> Extension of capability to a> Diffuse but similar/comparable activities iti across> Niches that can be identified"one by one"new market> Potential ti to combine a corebusinesses that might formcapability with an externalthe basis for a newasset (e.g. via M&A) or withopportunityalready existing assetselsewhere in the company33

2.3BACKUPSeveral moves beyond the core business have been successful> Supply > to demand focus (diamonds retail)> Audio equipment to automotive "infotainment" leader (OEM supplier)> Financial supermarket to leading credit card issuer> Comic book to movies and branded products> Newspaper to book and DVD publisher> Food products to food services business> Macs to iPod led music and content distributor> Local grocer to logistics driven #1 UK retailer34

2.3UNRELATED DIVERSIFICATIONConglomerates: Focus is on unrelated diversification, butlimited strategic diversity allowing for parenting advantagesProject exampleHANIEL PORTFOLIO LOGIC> Focus on services and retail/wholesale> System business, with– high value add– high capital turnover– high repeatability– high entry barriers> Leading market position> Growth from own cash flow> No restructuring cases> etc.RECENT DEVELOPMENTS> Divestiture of "Xella" building materialbusiness (not fit to portfolio logic)> Internationalization launched to repeatsuccessful business models> Restructuring initiatives for underperformingbusiness units driven by corporate holdingAllowing for superior parenting through similar success factors andreduction of complexity (e.g. applicableness of same performance figures)35Source: Roland Berger35

D. ROLE OF THE CENTER –Matching organization and processes with portfolio logicRoland_Berger_Diversification_out_of_box_20090907.PPTX36

The ability of the holding to contribute differs heavilydepending on portfolio logicRELATED DIVERSIFICATIONUNRELATED DIVERSIFICATION> Execute M&A and manage and postmergerintegration (long-termof value creation exceeded)> Actively invest- and divest (if zenithstrategy)> Raise/ provide capital for business> Facilitate synergies betweenunits based on transparent mechanicsbusiness units(internal capital market, access to> Centralize and direct manageexternal capital market)important functions such as R&D or> Drive better strategies and provideproduction (depending on synergies)management resources> Introduce (detailed planning and> Introduce management techniquesaccountability) shared servicesand best practices(HR, finance etc)> Launch KPIs and set ambitioustargetsSource: Roland Berger37

Optimization "role of the center": There are four major holdingmodelsSingleRelatedLess related Unrelatedbusiness businesses businesses businesses"OPERATOR""STRATEGICCONTROLLER""STRATEGICARCHITECT""PORTFOLIOINVESTOR"Source: Roland Berger38

Successful organizations design a center based on theirbusiness needsFOR DISCUSSIONRelatednessof thebusiness inthe portfoliohighOPPORTUNITIESSingaporeShellOF WASTEDAirlinesSYNERGIESLowKKRHutchisonSwireHansonEmerson3MUnileverICICanonPortfolio investor Strategic architect Strategic controller OperatorLowRole of the center(involvement in operative decisions)DESTRUCTIONOF VALUEHighSource: Roland Berger39

The center can perform six possible roles …DIS SCRETIONA ARY CORESTRATEGIC ROLESStrategy/ res. Synergy and Businessallocation skills transfer development> Resourceallocation> Vision andtargets> Strategicanalysis> Strategicplanning> Synergy iden-tification i andrealization> Best practicesharing> Technologysharing> Functional/specialistexpertisesharing> Identifying/execution onacquisition ordisposal> Integratingacquisitioniti> Evaluatingspin-off/exitopportunities> Building contactsnetworkPROCESS-RELATED ROLESMonitor/ Service Corporatecontrol provision functions> Capitalinvestmentanalysis> Financialplanning andcontrol systems> Definingpolicies> Managementdevelopment– Hiring andfiring> Training anddevelopment> Purchasing,property, ITcredit, etc.> Investorrelations> Secretarial> Legal> TaxSource: Roland Berger40

… that vary by the adopted modelOperatorStrategic controllerStrategic architectPortfolio investorSTRATEGY/RESOURCEALLOCATION> Detailed strategicplanning andimplementation> Central strategy, butexecution by businessunits> Development of topmanagement> Guide and monitorbusiness unit strategy> Development of topmanagement> Top management HRrecruitmentSYNERGY AND> Basic responsibility of> Control areas of synergy> Facilitate cross business> Does not play this roleSKILLSthe centerto maximize valuesharing of bet practicesTRANSFERBUSINESSDEVELOPMENT/EXPANSION> M&A execution and post-> M&A execution and post-> Work with businesses onmerger integration merger integration M&A execution, monitorintegration> Approve and monitorM&A execution andintegrationMONITORINGAND CONTROL> Detailed financialplanning and accounting> Detailed planning andaccounting for sharedservices> High level targets,aggregation of BU plans,monitoring and challenge> Set and monitor key highlevel financial targetsSERVICEPROVISION> Part of the operation > Direct management ofmany central services> Set policy for businessunits> Does not play this roleCORPORATE> All activities done by the> Center has limited> Center shares activities> Minimal functions to fulfillFUNCTIONS centerbusiness unit support with businessesstatutory requirementsSource: Roland Berger41

The resources, processes, and culture of the center need to bedefined based on the model and selected roleOperatorStrategic controller Strategic architectPortfolio investorRESOURCES> Large center> Important role ofthe center> Small center> Minimum role ofthe center neededPROCESSESAND INTER-FACES> Total integration ofprocesses andsystems> Only basicreporting systemsCULTURE> Maximumoperativeefficiencyi> ROIC> Basic perfor-mance alignments> Operative efficiencyand maximumpotential ti of synergiesand integration> High strategic directionand goalsClientCo?Source: Roland Berger42

BACKUPResources needed at the center are a direct function of themodel and role of the center> USD 36 bn annual revenues > USD 7 bn annual revenues > USD 18 bn annual revenues> Holding company with activities inelectronics, fire & safety, medicalsupplies, communication systemsand commercial finance. 6 divisions(historically)> Center heavily involved in financialcontrol and corporate governance> Mass retail product manufacturer.20 divisions> Center involved in strategicplanning, IT services and transfer ofcore competencies> Consumer electronicsmanufacturer. 5 divisions> Center heavily involved in coordi-nating R&D, sharing of technologyand product developmentPORTFOLIO INVESTOR MODEL STRATEGIC CONTROL MODEL OPERATOR MODELEmployees/H Q staff: 4,850 Employees/H Q staff: 130 Employees/H Q staff: 33Revenue/HQ staff: USD 720 m Revenue/HQ staff: USD 18 m Revenue/HQ staff: USD 12 mSource: Roland Berger43

ClientCo has to decide on one coherent model for its corporateholdingOperatorStrategic controllerStrategic architectPortfolio investor> Central managementof all criticaldecisions> CEO as "generalmanager"> Direct involvement inbusiness> Add value by runningthe business well> Central managementof key functions,especially technical> Centralization tocapture full value ofsale benefits> Beyond thesefunctions, businessunits maintain fullaccountability> Central control in afew key functionssuch as Finance,HR, etc.> Add value by– Driving betterstrategies– Setting moreambitious targets– Developing stron-ger management> Central capitalallocation> Add value by– Structuring cheapfinance– Buying businessescheap, sellingexpensive– Appointing the bestpeople to run thebusinesses inbetween> Singapore Airlines> Coca-Cola> Newell> Ford> Hutchison Whampoa> General Electric> KKR> Berkshire HathawayClientCo?Source: Roland Berger44

ILLUSTRATIVEThe role of the corporate parent has to be detailed alongseveral dimensions1Goal/target basedIssue based2Bottoms-up, decentralized d Top down, centralized3BU/function drivenCross-BU/function driven4Periodic, structured Ongoing, event driven5Standardized, templatedTailored, distributed6Tight plan/budget Loose plan/budget78910Data intensiveForecasting/trendsPassive, loose monitoringFormal communicationOption 1 Option 2 Option 3Judgment intensiveScenariosActive, tight monitoringInformal communication45

EXAMPLEFrench conglomerate Bouygues is organized successfully as"strategic architect"Role of the centerShare price vs. index [%]> Portfolio of independent businesses with leadingpositions in their markets and aim for long-termorganic growth (Construction: Road works,Building/Civil Works; Property; Telecom; Media;additional stake in Power-Transport Alstom)> Lean corporate center with a simple two-layerstructure (intermediate layer only reporting line with nooperational function)> Corporate center with influence on business unitstrategies (but not on ops)500400300200> Centralization of key functions finance, IT, Legal, HR > Sharing best practices between the businesses100(e.g. contract negotiations, purchasing,communications, human resources) organized in"Group Sustainable Development Department"31.08.199831.08.1999Bouygues31.08.200031.08.200130.08.200229.08.200331.08.200431.08.200531.08.200631.08.2007SBF29.08.2008Source: Thomson financial, Wesfarmers annual report, Press research, Roland Berger46

EXAMPLEAustralian conglomerate Wesfarmers manages businessesunits successfully as "portfolio investor"Role of the center> Full autonomy of business units (homeimprovement, coal, insurance, industrial & safety,chemicals & fertilizers, energy, other)> Active portfolio management with good M&A trackrecord (incl. smart shopping) and deep pocketsallowing for longer-term approach> Performance culture grounded on financialperformance (ROC) measures and value-basedmanagement in combination with risk managementand incentive systems (e.g. stock options)> Strict appliance of corporate governance rules andshareholder value approach> Focus on development of managementemployees (corporate center as pool of talentedresources)Share price vs. index [%]700600500Wesfarmers400300 ASX200100031.08.199831.08.199931.08.200031.08.200130.08.200229.08.200331.08.200431.08.200531.08.200631.08.200729.08.2008Source: Thomson financial, Wesfarmers annual report, Press research, Roland Berger47

To optimize the "role of the center" for ClientCo, two majorbuilding blocks have to be analyzed in detailORGANIZATION OF THE CORPORATE CENTERMANAGEMENT PROCESSES> Future structure of the holding (given changes in> Future business unit organizationportfolio)– Business unit segmentation– Strategic business units> Responsibilities and dimensioning of the holding– Allocation of work vs. business units> Value-based controlling– Departments– Strategic and mid-term planning– # of FTE– KPIs and corporate measures– Accounting standards> Introduction of a strong M&A department (incl.– Investment and capital allocation measuresprovision i of respective methods)> Target setting processes> Further strengthening of management> Value-based salaries (incentive systems)developmentValue-based management of ClientCoBusiness plan calculation (target setting)Source: Roland Berger48

E. ROLAND BERGER – Our experienceRoland_Berger_Diversification_out_of_box_20090907.PPTX49

Interdisciplinary teams are one main success factor for us andour clientsRoland Berger Struktur INDUSTRYCOMPETENCE CENTERFUNCTIONALCOMPETENCE CENTERAutomotive >Energy & Chemicals >Consumer Goods & Retail >Engineered Products & High Tech >Financial Services >InfoCom >Pharma & Healthcare >Public Services >Transportation >< Corporate Development< Information Management< Marketing & Sales< Operations Strategy< Restructuring & Corporate FinanceJoint teamsJoint problem solutionsSource: Roland Berger50

Excellence in strategy consultancy means providing soundexpertise in all aspects relevant to the top managementOur commitment to excellence – Examples of strategy projectsSTRATEGY PROJECTS IN 2007 [%]EXAMPLES OF PROJECT ISSUESMarketing> Sustainable growth strategiesOperations,informationmanagement26%9%> Value-creating concepts forpost-merger integration> Decentralized organizational structuresFinance,restructuring24%41%Corporatedevelopment> Rule-breaking brand strategies> Vl Value-oriented client managementSource: Roland Berger51

We have significant experience with comparable portfolioprojectsExamplesTopics> Portfolio transparency and core definition(customers, channels, countries)> Identification of strategic and operational fullpotential incl. measures to achieve performanceimprovements> Definition of growth segments and candidatesfor acquisition> Identification of exit/ divestiture candidates> Re-definition of corporate center and its role andfunctionsSource: Roland Berger52

Our expertsHauke MojePartnerFlorian BerndtProject ManagerCompetence Center Corporate PerformanceRoland Berger Strategy ConsultantsAm Sandtorkai 41, 20457 HamburgPh.: +49 40 37631-4310e-mail: hauke_moje@de.rolandberger.comCompetence Center Corporate PerformanceRoland Berger Strategy ConsultantsAm Sandtorkai 41, 20457 HamburgPh.: +49 40 37631- 4335e-mail: florian_berndt@de.rolandberger.com53

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