Roland Berger - Diversification Out of Box 2008 PDF

Diversification "out
out of the box"

box
Munich, October, 2008
Contents
Page
A. Our approach A structured concept based on four building blocks
B. Portfolio transparency Bringing existing businesses to target performance
C Portfolio management Reshaping the portfolio (invest

C.
(invest, divest)
18
D. Role of the center Matching organization and processes with portfolio logic
36
E. Roland Berger Our experience
49
2008 Roland Berger Strategy Consultants GmbH
A. OUR APPROACH
A structured concept based on four building blocks
Roland_Berger_Diversification_out_of_box_20090907.PPTX
Some few care questions regarding diversification can be

observed
DIVERSIFIED COMPANIES
> Where to optimally invest allocating
money to existing
i i or entering
i new
businesses?
> Which businesses should potentially be
di t d?
divested?
FOCUSED COMPANIES
> What could be adjacent growth options,

strengthening
h i the
h current bbusiness?
i
?
> What are strategic options if further
growth in core business or adjacent
businesses is limited or even at risk?
> What is the right "role of the center" and

how to avoid a "conglomerate
conglomerate discount
discount"??
Our modular approach consists of four building blocks

applicable for both diversified and still focused companies
1 Portfolio transparency
> Cond
Conduct
ct bottom-up
bottom p portfolio
segmentation
> Achieve portfolio transparency
> Define core businesses
> Review portfolio elements "target performance" and derive initiatives
(profitability/growth measures)
2 Portfolio management
> Derive portfolio logic
> Conduct valuation and identify
divestment candidates
> Search for growth options (organic,
inorganic)
> Get
G t agreementt ffrom shareh
andd
stakeholders
Source: Roland Berger
3 Role of the center
> Review of "role of the

center" (incl. cost
benchmarks vs. other
holdings)
> Development of
cornerstones for future
group organization
> Blueprint and rough
dimensioning of holding
functions ((and
management processes)
4 Implementation
> Set-up of implementation

plan
Responsibilities
Tasks, Milestones, and
Timelines
> Develop
D l communication
i ti
concept (internal, capital
markets)
> Prepare of board meeting
f decision
for
d i i
B. PORTFOLIO TRANSPARENCY
B i i existing
Bringing
i ti bbusinesses
i
tto ttargett performance
f
Our modular approach consists of four building blocks:

Portfolio transparency
4 Implementation
1.1 Conduct bottom-up portfolio
segmentation
1.2 Achieve portfolio transparency
1.3 Define core businesses
1.4 Review portfolio elements "target
performance" and derive initiatives
> Derive portfolio logic
> Conduct valuation and identify
> Search for growth options (organic,
inorganic)
> Get
andd
stakeholders

center" (incl. cost
holdings)
> Development of
group organization
functions ((and

plan
Responsibilities
Timelines
> Develop
D l communication
i ti
markets)
f decision
for
d i i
In most companies, the organization of business units doesn't

follow a "true market logic"
Illustrative examples
Construction
Co
Doors
> Entry doors
> Garage doors
Garage
Door openers
> Are entry and

garage doors
really one
business?
> Shouldn't
garage doors
openers
managed
together with
garage doors?
UtilityCo
Power
generation
Power
transmission &
distribution
> Is transmission & distribution an

own business?
> What is the right regional market
definition for generation? (does it
make sense to expand
geographically?)
HighTechCo
Power retail
Touring quality
microphones &
speakers
> Is it possible to
sell electricity
without own
generation
capacities?
> Are speakers &

microphones
really on
business, only
because of
similar
distribution
c a es
channels?
A bottom-up portfolio segmentation is needed to understand business

competitive position and to derive right strategic insights
8
1.1
A proper bottom-up portfolio segmentation is the first step to

achieve portfolio transparency
High One portfolio element
(synergies might allow
for outpacing strategy)
Related, but separate portfolio
elements (synergies can lead to
cost leadership)
Cost
Sharing
Unrelated portfolio elements

Low
Low
One portfolio element
Related, but
separate
portfolio
elements
(might be
bundled)
Customer Sharing
g
One portfolio
element
(products might
substitute each
other)
In addition
REGIONAL
SCOPE OF
BUSINESS to
be analyzed
High
Portfolio segmentation should mirror boundaries of the

battlefield within which companies compete at the market
9
1.1
EXAMPLES
The correct portfolio segmentation can lead to insights, whilst

incorrect segmentation can result in serious consequences
INSIGHTS FROM
CORRECT PORTFOLIO SEGMENTATION
STRATEGIC CONSEQUENCES OF
INCORRECT PORTFOLIO SEGMENTATION
STRATEGIC
> 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 growing
downstream/upstream?
> Can we exit a business without weakening the core
business?
> Do we have to grow through M&A to be successful in
the future?
CUSTOMERS
> Neglect profitable customer segments or over-invest
in unprofitable customers
> Give away opportunities to capture synergies
> Misjudge relevant trends
> Overlook relevant geographies
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 higher
scale? (e.g. distribution centers; salesforce)
COSTS
> Induce unnecessary costs
> Give away opportunities to capture synergies
> Do not transfer experience
> Under invest in important R&D initiatives
COMPETITORS
> Overlook threats from competition
> Miscalculate "real market share" (as proxy for scale and
achievable pprofits))
> Set inappropriate targets
> Overlook relevant capacity changes in the industry
> Misjudge true cost position
10
1.1
BACKUP
Wrong business definition can result in major strategic failures
TOO BROAD
D
TOO NA
ARROW
COMPANY
CORE DEFINITION MISTAKE
OUTCOME
> Polaroid defined it's core as

chemical/paper based processing and
missed the broader definition of image
capture in the digital age
> Went Bankrupt

p in 2001
> American Express believed charge cards

and credit cards were separate
businesses. Charge card division lost
money due to poor cost position and failed
marketing
k ti strategy
t t
> 50% drop in market value

(1986-1991)
> Gillette viewed its core as "checkout

purchases" and thus diversified into
b tt i (Duracell)
batteries
(D
ll) andd writing
iti iinstruments
t
t
(Parker)
> Stock price reduced by greater than 50%

(1998-2001)
> Saatchi viewed advertising and consulting

as one business;
b i
ffailed
il d tto ttransfer
f
expertise and suffered from lack of focus
> Company suffered severe losses due to

i bilit tto ttransfer
inability
f experience,
i
llackk off
focus, and tainted image
11
1.2
EXAMPLE
The analysis of properly segmented portfolios can be based on

"market attractiveness" and "competitive position"
Project example
Market
attractiveness
STRATEGIC IMPERATIVES
MTS
Sistema-Hals
4
Binnofarm
> Market size

> Market growth
> Market
profitability
MBRD
MTT
Comstar OTC/MGTS
Concern RTI Systems

Sistema mass-media
> Borderliner: Bring to

strategic and/or operational
"target performance" and
move to topp pposition ((e.g.
g
increase market share to
sustainable size by M&A,
restructure operations)
Medsi/Medsi-2
Detskiy Mir/DM Center
Sky Link
Russian World Studios
Intourist
Dalcombank
Sitronics
TS-Retail
1
0
0
Top position
Borderliner
Weak position
Source: Roland Berger Project example
> Top position: Further

invest in businesses (and
grow in related areas)
> Weak position: Divest (or

perform "leap frog")
Competitive position
> Relative market share
> Relative performance (e.g. ROCE/ROS vs. competitors)
> Performance vs. key purchasing factors
12
1.3
EXAMPLE
The definition of core business and "satellites" should be

based on a sharing analysis (and size/ financial performance)
Project example (Related Diversification)
RELATEDNESS ANALYSIS
Capability sharing
A
B
100%
8%
A
Cost sharing
B 100%C
C t A sharing
Customer
h CB100%
i A 8%
5%8%
13%5%
A
B
C
D
D
100%C 60%13%
B A D 8%B 10%
100%
10%
5%8%
13%5%
100%
C
100% 60%
13%
50%
10%
80%
D8%
5%
10%
13%
60%
100%
80%
80%
100%
CORE DEFINITION
Related
Businesses
D
5%
10%
13%D
50%
%
100%
10% 80%
80%
50% 100%
80%
100%
> Assessment of relatedness of businesses

by using three main criteria (and
respective sub-criteria)
"Unrelated
Businesses"
Packaging
Processing
ocess g
Consumer
C
Business
Project
Business
Core
Businesses
Prof
fessional
i
l
MRO
Automotive
Electronics
> Calculation of "economic relatedness" as

weighted average of criteria
Detailed input for concrete synergies measures

Source: Project example
Portfolio logic with indication for "role of the center"

13
ILLUSTRATIVE
1.4
Before deciding on portfolio changes, the future "target

performance" has to be evaluated
Point of Departure
Target performance
Market
attractiveness
Market
attractiveness
1
1
Core revenues
52
Non-core revenues
14
1.4
ILLUSTRATIVE
Portfolio options should be based on "target performance"

assessment
Project example
Illustrative
target performance Portfolio
Options
High level analysis of key

High-level
implications
"Optimize Status Quo"
Strategic
> Portfolio implications
> Market position?
"Focus on regional
expansion"
p
Financially
> Revenues
> EBIT
> Investment needs
"Focus on winning
businesses"
businesses
Investors' storyline
> Shareholders
> Analysts, Press, etc.
"Other strategic
options"
options
Likelihood of option success

> What do we have to believe for each option?
> How likely is that?
> Discontinuities to influence?
15
1.4
To capture the "target performance" per business, four major

building blocks have to be analyzed
Value drivers
Strategic
Operational
Organizational
Financial
> Do we have the right

scale? How do we
build it?
> Who is the best
parent for activities
we undertake?
> Are we maximising

our revenues? e.g.
Customer
segmentation
Product design
Delivery
excellence
> Are we minimising
our costs?
> Are we measuring
ourselves effectively?
> Do we have the right

capabilities?
> Is it clear who makes
decisions?
> Do we have a high
performance
culture?
> Are we valued and

priced appropriately?
> Can we increase
working capital and
cash flow?
> Is the balance sheet
optimized?
> How efficient is our
use of capital?
16
ILLUSTRATIVE
1.4
Top-down targets for strategic and operational "target

performance" can be derived from ROS/RMS analysis
ROS/RMS Illustrative
High
Returns earned (ROS)
Cost of capital
ClientCo businesses
with sustainable
relative market share
(local, regional)?
Subscale
(below strategic
target
performance)
Low
Restructuring case
(below target performance)
Low
Relative market share (RMS)
ClientCo businesses
at operational target
performance?
High
17
C. PORTFOLIO MANAGEMENT Reshaping the portfolio
18
Our modular approach consists of four building blocks:

Portfolio management
> Cond
Conduct
ct bottom-up
bottom p portfolio
segmentation
> Achieve portfolio transparency
> Define core businesses
> Review portfolio elements "target performance" and derive initiatives
2.1 Derive portfolio logic
C d t valuation
l ti andd identify
id tif
2.2 Conduct
2.3 Search for growth options (organic,
inorganic)
> Get
andd
stakeholders

center" (incl. cost
holdings)
> Development of
group organization
functions ((and
4 Implementation

plan
Responsibilities
Timelines
> Develop
D l communication
i ti
markets)
f decision
for
d i i
19
2.1
EXAMPLE
The overall portfolio logic is the most crucial question for

ClientCo management
PORTFOLIO LOGIC
Risk
Focused vs.
vs diversified
Synergy
Related vs. Unrelated businesses1)
V l chain
Value
h i
Production vs
vs. services
Products
Commodity vs. niche/specialists
Lif
Lifecycle
l
M t vs. emerging
Mature
i industries
i d ti
Regions
Russia vs. emerging countries vs. world
Other
Question for ClientCo (outside-in)

> How to reduce dependency on
XY businesses? (if needed)
> How to position ClientCo
("related diversifier" vs.
"conglomerate") ?
> How does the technology
business unit fit in the portfolio
(production vs. services)?
Potential for
f the holding to contribute value
1) Related business to achieve synergies between portfolio elements due to high customer, cost, capability sharing
20
2.1
BACKUP
The portfolio logic need to be evaluated on a detailed basis to

avoid value destruction
Vivendi The synergy dream
Vivendi Refocusing to Telco & Media
"(We will be) the world's preferred creator and provider of

personalized information,
information entertainment and services to consumers
anywhere, at any time and across all distribution platforms and
services."
Jean-Marie Messier, then CEO, Vivendi Universal, April 2001
"Contrary to what was hoped for and what was proclaimed, Vivendi
has no significant synergies between its components.
components []
[ ] If
Jean-Marie Messier had remained chief executive, Vivendi Universal
would have declared itself insolvent within 10 days."
Jean-Rene Fourtou, CEO, Vivendi Universal, May 2003
"You
You need to look at (Vivendi Universal) as the General Electric of
entertainment then it is a beautiful company. If, on top of that,
you create the convergence, then it is even more beautiful. But
even if we fail, you still have GE."
Dennis Olivennes, Deputy of Canal Plus, April 2001
" there never was a business model of the future hidden among
Vivendi's disparate holdings. The assets assembled by Mr. Messier
were a grab-bag, nothing more."
Manager's Journal, Wall Street Journal, May 2003
Share price 31.12.98-31.12.02 vs. index [%]
Share price 31.12.02-29.08.08 vs. index [%]

VIV: 172
SBF: 81
SBF: 151
VIV: 21
Source: Roland Berger, Press research, Thompson financial
21
2.1
PROJECT APPROACH
The definition of the future portfolio logic should be elaborated

in close collaboration with the ClientCo top-management
Interactive development of future portfolio logic
Input from "as is" analysis
Cooperation with ClientCo Top-Management
> Understanding of current businesses

performance
f
andd th
theiri "target
"t
t
performance" (strategic, operative,
financial)
Expert interviews to challenge results and test/derive

h th
hypotheses
> Analysis of relatedness (synergies,

(synergies
similarity of success factor) between
businesses and "core definition"
> Description of ClientCo strength and
assets
Operations/USP
Holdingg
Workshop with Top-Management to agree on future

portfolio logic
22
2.2
ILLUSTRATIVE
The arithmetic for valuation of portfolio elements has to be

agreed with ClientCo management at the beginning of the project
Business unit profitability
EBIT
Increased value
ROCE > WACC > 0
"Pearls"
Pearls
Deviation vs.
risk adjusted
market
profitability
"Underperformers"
Profitability of
capital
ROCE
Capital
Employed
Spread
ROCE - WACC
Decreased value
ROCE < WACC < 0
Risk adjustment
CE
Total cost of capital WACC
23
2.2
ILLUSTRATIVE
After defining the portfolio logic, the actual businesses have to

be evaluated "strategically"
Value based portfolio (status quo)
Hold
H
ld without
i h further
f h investments
i
(Divest if good deal)
BU 7
Deviation vs.
risk adjusted
market
profitability
e.g.: Are significant additional

investments required to keep
good profitability?
"Pearls"
Pearls
Restructure or exit
e.g.: What are (additional)
initiatives) to reach operational
target performance
BU 2
BU 6
Low
BU 1
e.g.: Does this business have

a sustainable relative market
share?
Divest
e.g.: What are additional

adjacent growth
opportunities?
BU 4
BU 3
Fi
Finance
ffutrher
h growth
h
e.g.: Who would be a

better corporate
parent?
Fit to portfolio logic
"Underperformer"
Underperformer
BU 5
High
Bubble size = invested capital (assets)

24
2.2
EXAMPLE
"Underperformer" businesses have to checked for future

"target performance" before final decision
Value based portfolio (underperformer businesses only)
High
Value creation
opportunities within
business
(bring businesses to
"target performance")
DRESSING UP &
PREPARE
FOR SALE
MANAGE FOR
MAXIMUM VALUE
(RESTRUCTURE)
DISINVEST RAPIDLY
PREPARE
FOR SALE
Low
Low
Fit to
t portfolio
tf li llogic
i
High
25
2.3
Growth options: Different approaches have to be chosen

depending on agreed portfolio logic
RELATED DIVERSIFICATION
UNRELATED DIVERSIFICATION
Identification of potential growth areas
New products/
services
First
Selection
New
businesses
New geographies
Current
core
New
distribution
channels
New
customer
segments
Industry
funnel
Segment
g
analysis
New parts
of value chain
> Brainstorming
> Idea tree
> Horizontal/ vertical
integration
pp
in the
> Opportunities
market
>
>
>
>
"Success stories"
Activities of stakeholders
Trend-Analyses
etc
Prioritization of industries
> Coherence with
diversification goals
> Profitability
> Synergies (tbd)
> "Fit"
> Reasons for exclusion

Moral, Ethics, Politics
Controllability
(Technology Mgmt.)
Ownership structure & size
Definition for "deep dive" segments

> M
Market
k t attractiveness
tt ti
> Competitive landscape
> Threats (e.g. substitution)
> M
Market
k t bbarriers
i
> Cost of market entry
> etc
26
P t ti l targets
Potential
t
t
"Starting search from core"

"Funneling attractive opportunities"

26
2.3
Identifying businesses for successful related diversification

requires a methodical approach
Build factbase to support decision making
Assess strength
of core
> Assess the strength
g
of core business and
identify opportunities
to reinforce the core
business
Identify full set

of opportunities
> Identifyy and mapp the
full set of businesses related to
existing core
business(es)
Prioritize
opportunities
> Determine which
opportunities are
most attractive to
pursue
Evaluate odds of
success (relatedness to core
business ability
business,
to differentiate)
Assess
attractiveness
Develop entry
strategy
> Within target
g
businesses,
determine best
growth themes,
potential
acquisition targets,
and organic
opportunities
> Organize for
success
27
27
2.3
The growth spider can help to identify further opportunities

Client example
Tetra
Pouch
Storage
Technology
Retortable
Chilled
Materials
Aseptic
Plastic
SBM
Plastic
Closures Preforms Bottle
Premium
Family
Tetra
Classic
Value
Family
Value Added
Dairy
Juice
Other Still
F d&
Food
Beer Beverages
Carbonated
Drinks
Other Line
Equipment
Value
Portion
PaperPackaging
Milk
Board Cream
Processing
Sweden
Milk
Premium
Portion
Tetra
Brik
Preserved
& Stable
Product
Contents
Customer
Segments
Tetra
Many
Inert
Ingredients
Plastic
Film
Package
yp
Types
Northern
N
th
Europe
Southern
Europe
Early Asia
Cheese
Processing
Value Chain
Factory
Management
Latin
America
USA
China
Geography
28
2.3
Odds of success for related diversification decrease with

higher distance to core
Shared
customers
Shared
costs
Shared
channels
Shared
Shared
competitors capabilities/
technology
Odds of ssuccess
Core
1 step
t
diversification
2 step
diversification
3 step
diversification
Unrelated
"stand alone"
PRIMARY
DIMENSIONS
Full share
Partial share
No share
29
2.3
Distance to core needs to be defined properly

CRITERIA
Customer
sharing
DEFINITION
> Percentage of
> Percentage of the
incremental
new cost base that
revenue generated
lends itself to
from existing
sharing with the
customer base
existing business
CRITERIA
WEIGHTING
Cost
sharing
0-20%
0-5%
21-40%
5-15%
41-60%
16-25%
61-80%
26-35%
81-100%
1.00
Capability
sharing
Channel
sharing (tbd)
> Extent to which the > Percentage of

target business
additional revenue
utilises existing
generated through
technology and
existing channel
business models
players
No technology or
b i
business
model
d l
overlap
Competitor
sharing
> Percentage of
incremental new
market made up of
existing competitors (excluding
share held by
entrant)
0-20%
0-20%
21-40%
21-40%
41-60%
41-60%
61-80%
61-80%
>36%
Same technology
and businesses
models
81-100%
81-100%
1.00
1.00
0.50
0.75
30
2.3
Identified growth opportunities can be prioritized by analysis of

market attractiveness and odds of success
Case example
5
Medical/wound care
Market
attractiveness
> Size
> Growth
> Profitability
Internal
medical
3
Specialty
bandages
External medical
Composites
Industrial tapes (specialty)
EUR 500 m
market size
Decorative industrial flooring

1
1
Recommended focus
of further analysis
Odds of success
> Relatedness to core business
> Competitive dynamics (e.g. share of Top 3 players)
> Ability to differentiate (vs. competitors)
31
2.3
If related growth options are restricted, the search has to be

conducted more "broadly"
Untapped platforms
Neglected customer assets
Disregarded capabilities
> Yet less developed adjacent

businesses
> Unrecognized customer

segments
> Step-motherly treated

products
d t (i(in ddynamic
i
markets)
> Privileged access or trust from

t i customer
t
groups ((e.g.
certain
strong brand image)
> Hidden corporate capabilities

(e.g. growth from shared
services)
> Unused data and information
> N
Non-core capabilities
biliti in
i th
the
businesses with high value to
customers (today, future)
Identification of assets, which currently do not drive growth,

but may enable growth in so far unrecognized businesses
32
2.3
Indicators for growth potentials beyond the core business can

be identified along three dimensions
Untapped platforms
Neglected customer assets
Disregarded capabilities
> Robust leadership position

in a niche segment (no
matter of size)
> New emerging customer

segments (with attractive profit
pool)
> U
Unusuall success despite
d it
low attention
> Hi
Historic,
t i but
b t "forgotten"
"f
tt "
customer segments
> Opportunity to bring a core

capability to the next level
(e.g. to become a "market
maker"))
maker
> Diffuse but similar/

comparable
bl activities
ti iti across
businesses that might form
the basis for a new
pp
y
opportunity
> Niches that can be identified

"
"one
bby one""
> Extension of capability to a

new market
> P
Potential
t ti l to
t combine
bi a core
capability with an external
asset (e.g. via M&A) or with
alreadyy existingg assets
elsewhere in the company
33
2.3
BACKUP
Several 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
N
to
t book
b k andd DVD publisher
bli h
> Food products to food services business
> Macs to iPod led music and content distributor
> Local grocer to logistics driven #1 UK retailer
34
2.3
Conglomerates: Focus is on unrelated diversification, but

limited strategic diversity allowing for parenting advantages
Project example
HANIEL PORTFOLIO LOGIC
RECENT DEVELOPMENTS
> Focus on services and retail/wholesale

> System business, with
high value add
high capital turnover
high repeatability
high
g entryy barriers
> Leading market position
> Growth from own cash flow
> No restructuring cases
> etc.
> Divestiture of "Xella" building material

business (not fit to portfolio logic)
> Internationalization launched to repeat
successful business models
> Restructuring initiatives for underperforming
business units driven byy corporate
p
holdingg
Allowing for superior parenting through similar success factors and

reduction of complexity (e.g. applicableness of same performance figures)
35
35
D. ROLE OF THE CENTER

Matchingg organization
g
and pprocesses with pportfolio logic
g
36
The ability of the holding to contribute differs heavily

depending on portfolio logic
> Execute M&A and manage and postmerger integration (long-term
strategy)
> Facilitate synergies between
business units
> Centralize and direct manage
important functions such as R&D or
production (depending on synergies)
> Introduce (detailed planning and
accountability) shared services
(HR, finance etc)
> Actively invest- and divest (if zenith
of value creation exceeded)
> Raise/ provide capital for business
units based on transparent mechanics
(internal capital market, access to
p market))
external capital
> Drive better strategies and provide
management resources
> Introduce management techniques
and best practices
> Launch KPIs and set ambitious
targets
37
Optimization "role of the center": There are four major holding

models
Single
business
Related
businesses
Less related
businesses
Unrelated
businesses
"OPERATOR"
"STRATEGIC
CONTROLLER"
"STRATEGIC
ARCHITECT"
"PORTFOLIO
INVESTOR"
38
Successful organizations design a center based on their

business needs
FOR DISCUSSION
high
Relatedness
of the
business in
th portfolio
the
tf li
OPPORTUNITIES
OF WASTED
SYNERGIES
Emerson
ICI
Canon
Unilever
Hutchison
KKR
Swire
3M
Hanson
Low
Portfolio investor
Low
Singapore
Airlines
Shell
Strategic architect
DESTRUCTION
OF VALUE
Strategic controller Operator
Role of the center

(involvement in operative decisions)
High
39
The center can perform six possible roles

STRATEGIC ROLES
CORE
> Resource
allocation
> Vision and
targets
DIS
SCRETIONA
ARY
Strategy/ res.
allocation
> Strategic
analysis
l i
> Strategic
planning
Synergy and
skills transfer
> Synergy identification

ifi i andd
realization
> Best practice
sharing
> Technology
sharing
> Functional/
specialist
expertise
sharing
PROCESS-RELATED ROLES
Business
development
> Identifying/
execution
i on
acquisition or
disposal
> Integrating
acquisition
i iti
> Evaluating
spin-off/exit
opportunities
> Building contacts network
Monitor/
control
Service
provision
Corporate
functions
> Capital
investment
analysis
> Defining
policies
> Investor
relations
> Secretarial
> Legal
> Tax
> Financial
planning
l i andd
control systems
> Management
d l
development
Hiring and
firing
> Training and
d l
development
t
> Purchasing,
property, IT
credit, etc.
40
that vary by the adopted model

Operator
Strategic controller
Strategic architect
Portfolio investor
STRATEGY/
RESOURCE
ALLOCATION
> Detailed strategic

planning and
implementation
> Central strategy, but

execution by business
units
> Development of top
management
> Guide and monitor

business unit strategy
> Development of top
management
> Top management HR

recruitment
SYNERGY AND
SKILLS
TRANSFER
> Basic responsibility of

the center
> Control areas of synergy

to maximize value
> Facilitate cross business

sharing of bet practices
> Does not play this role
BUSINESS
DEVELOPMENT/
EXPANSION
> M&A execution and postmerger integration
> M&A execution and postmerger integration
> Work with businesses on

M&A execution,
execution monitor
integration
> Approve and monitor

M&A execution and
integration
MONITORING
AND CONTROL
> Detailed financial

planning and accounting
> Detailed planning and

accounting for shared
services
> High level targets,

aggregation of BU plans,
monitoring and challenge
> Set and monitor key high

level financial targets
SERVICE
PROVISION
> Part of the operation
> Direct management of

many central services
> Set policy for business

units
> Does not play this role
CORPORATE
FUNCTIONS
> All activities done by the

center
> Center has limited

business unit support
> Center shares activities

with businesses
> Minimal functions to fulfill

statutory requirements
41
The resources, processes, and culture of the center need to be

defined based on the model and selected role
Operator
Strategic controller Strategic architect
Portfolio investor
RESOURCES
> Large center

> Important role of
the center
> Small center

> Minimum role of
the center needed
PROCESSES
AND INTERFACES
> Total integration of

processes and
systems
> Only basic

reporting systems
CULTURE
> Maximum
operative
ffi i
efficiency
> Operative efficien- > High strategic dicy and maximum

rection and goals
potential
t ti l off synergies and integration
> ROIC
> Basic performance alignments
ClientCo?
42
BACKUP
Resources needed at the center are a direct function of the

model and role of the center
> USD 36 bn annual revenues
> Holding company with activities in
electronics, fire & safety, medical
supplies, communication systems
and commercial finance. 6 divisions
(historically)
> Center heavily involved in financial
control and corporate governance

> Mass retail product manufacturer.
20 divisions
> Center involved in strategic
planning IT services and transfer of
planning,
core competencies

> Consumer electronics
manufacturer. 5 divisions
> Center heavily involved in coordinating R&D,
R&D sharing of technology
and product development
PORTFOLIO INVESTOR MODEL
STRATEGIC CONTROL MODEL
OPERATOR MODEL
Employees/H Q staff:
Revenue/HQ staff:
Revenue/HQ staff:
Revenue/HQ staff:
4,850
USD 720 m
130
USD 18 m
33
USD 12 m
43
ClientCo has to decide on one coherent model for its corporate

holding
Operator
Strategic controller
Strategic architect
Portfolio investor
> C
Central
t l management of all critical
decisions
> CEO as "general
general
manager"
> Direct involvement in
business
> Add value by running
the business well
> C
Central
t l managementt
of key functions,
especially technical
> Centralization to
capture full value of
sale benefits
> Beyond these
functions, business
units maintain full
accountability
> C
Central
t l control
t l in
i a
few key functions
such as Finance,
HR,, etc.
> Add value by
Driving better
strategies
Setting more
ambitious targets
Developing stronger management
Central
t l capital
it l
> C
allocation
> Add value by
Structuring cheap
finance
Buying businesses
cheap, selling
expensive
Appointing the best
people to run the
businesses in
between
> Singapore Airlines

> Coca-Cola
> Newell
> Ford
> Hutchison Whampoa

> General Electric
> KKR
> Berkshire Hathaway
ClientCo?
44
ILLUSTRATIVE
The role of the corporate parent has to be detailed along

several dimensions
1 Goal/target based
Issue based
B tt
d
decentralized
t li d
2 Bottoms-up,
T ddown, centralized
Top
t li d
3 BU/function driven
Cross-BU/function driven
Periodic structured
4 Periodic,
Ongoing event driven

Ongoing,
5 Standardized, templated
Tailored, distributed
6 Tight plan/budget
Loose plan/budget
7 Data intensive
Judgment intensive
8 Forecasting/trends
Scenarios
9 Passive, loose monitoring
Active, tight monitoring
10 Formal communication
Informal communication
Option 1
Option 2
Option 3
45
EXAMPLE
French conglomerate Bouygues is organized successfully as

"strategic architect"
Role of the center
Share price vs. index [%]
> Portfolio of independent businesses with leading

positions in their markets and aim for long-term
organic growth (Construction: Road works,
Building/Civil Works; Property; Telecom; Media;
additional stake in Power-Transport Alstom)
> Lean corporate center with a simple two-layer
structure (intermediate layer only reporting line with no
operational function)
> Corporate center with influence on business unit
strategies (but not on ops)
g , HR
> Centralization of keyy functions finance,, IT,, Legal,
> Sharing best practices between the businesses
(e.g. contract negotiations, purchasing,
communications, human resources) organized in
"Group
Group Sustainable Development Department
Department"
500
Source: Thomson financial, Wesfarmers annual report, Press research, Roland Berger
Bouygues
400
300
200
SBF
29.08.2008
31.08.2007
31.08.2006
31.08.2005
31.08.2004
29.08.2003
30.08.2002
31.08.2001
31.08.2000
31.08.1999
31.08.1998
100
46
EXAMPLE
Australian conglomerate Wesfarmers manages businesses

units successfully as "portfolio investor"
Role of the center
Share price vs. index [%]
> Full autonomy of business units (home

improvement, coal, insurance, industrial & safety,
chemicals & fertilizers, energy, other)
> Active portfolio management with good M&A track
record (incl. smart shopping) and deep pockets
allowing for longer-term approach
> Performance culture grounded on financial
performance (ROC) measures and value-based
management in combination with risk management
and incentive systems (e.g. stock options)
> Strict appliance
pp
of corporate
p
g
governance rules and
shareholder value approach
> Focus on development of management
employees (corporate center as pool of talented
resources)
700
Source: Thomson financial, Wesfarmers annual report, Press research, Roland Berger
600
W f
Wesfarmers
500
00
400
300
ASX
200
29.08.2008
31.08.2007
31.08.2006
31.08.2005
31.08.2004
29.08.2003
30.08.2002
31.08.2001
31.08.2000
31.08.1999
31.08.1998
100
47
To optimize the "role of the center" for ClientCo, two major

building blocks have to be analyzed in detail
ORGANIZATION OF THE CORPORATE CENTER
> Future structure of the holding (given changes in
portfolio)
> Responsibilities and dimensioning of the holding
Allocation of work vs.
vs business units
Departments
# of FTE
> Introduction of a strong M&A department (incl.
provision
i i off respective
ti methods)
th d )
> Further strengthening of management
development
MANAGEMENT PROCESSES
> Future business unit organization
Business unit segmentation
Strategic business units
> Value-based controlling
Strategic and mid-term planning
KPIs and corporate measures
Accounting standards
Investment and capital allocation measures
> Target setting processes
> Value-based salaries (incentive systems)
Value-based management of ClientCo
Business plan calculation (target setting)

48
E. ROLAND BERGER Our experience
49
Interdisciplinary teams are one main success factor for us and

our clients
Roland Berger Struktur
INDUSTRY
COMPETENCE CENTER
Automotive >
Energy & Chemicals >
Consumer Goods & Retail >
Engineered Products & High Tech >
Financial Services >
InfoCom >
Pharma & Healthcare >
Public Services >
Transportation >
FUNCTIONAL
COMPETENCE CENTER
< Corporate Development
< Information Management
< Marketing & Sales
< Operations Strategy
< Restructuring & Corporate Finance
Joint teams
Joint problem solutions
50
Excellence in strategy consultancy means providing sound

expertise in all aspects relevant to the top management
Our commitment to excellence Examples of strategy projects
STRATEGY PROJECTS IN 2007 [%]
EXAMPLES OF PROJECT ISSUES

> Sustainable ggrowth strategies
g
Marketingg
Operations,
information
management
Finance,
restructuring
> Value-creating concepts for

post-merger integration
9%
26%
> Decentralized organizational structures

41%
24%
> Rule-breaking brand strategies

Vl
i t d client
li t managementt
> Value-oriented
Corporate
development
51
We have significant experience with comparable portfolio

projects
Examples
Topics
> Portfolio transparency and core definition
(customers, channels, countries)
> Identification of strategic and operational full
potential incl. measures to achieve performance
improvements
> Definition of growth segments and candidates
for acquisition
> Identification of exit/ divestiture candidates
> Re-definition of corporate center and its role and
functions
52
Our experts
Hauke Moje
Partner
Florian Berndt
Project Manager
Competence Center Corporate Performance

Roland Berger Strategy Consultants
Competence Center Corporate Performance

Roland Berger Strategy Consultants
Am Sandtorkai 41, 20457 Hamburg

Ph.: +49 40 37631-4310
e-mail: hauke_moje@de.rolandberger.com
Am Sandtorkai 41, 20457 Hamburg

Ph.: +49 40 37631- 4335
e-mail: florian_berndt@de.rolandberger.com
53
We deliver results
54

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Diversification "out

out of the box"

A. Our approach A structured concept based on four building blocks

B. Portfolio transparency Bringing existing businesses to target performance

C Portfolio management Reshaping the portfolio (invest

E. Roland Berger Our experience

2008 Roland Berger Strategy Consultants GmbH

Some few care questions regarding diversification can be

> What could be adjacent growth options,

> What is the right "role of the center" and

Our modular approach consists of four building blocks

3 Role of the center

> Review of "role of the

> Set-up of implementation

Our modular approach consists of four building blocks:

3 Role of the center

1.1 Conduct bottom-up portfolio

> Review of "role of the

> Set-up of implementation

In most companies, the organization of business units doesn't

> Are entry and

> Is transmission & distribution an

> Are speakers &

A bottom-up portfolio segmentation is needed to understand business

A proper bottom-up portfolio segmentation is the first step to

Unrelated portfolio elements

One portfolio element

Portfolio segmentation should mirror boundaries of the

The correct portfolio segmentation can lead to insights, whilst

Wrong business definition can result in major strategic failures

Source: Roland Berger

CORE DEFINITION MISTAKE

> Polaroid defined it's core as

> Went Bankrupt

> American Express believed charge cards

> 50% drop in market value

> Gillette viewed its core as "checkout

> Stock price reduced by greater than 50%

> Saatchi viewed advertising and consulting

> Company suffered severe losses due to

The analysis of properly segmented portfolios can be based on

> Market size

Concern RTI Systems

> Borderliner: Bring to

Source: Roland Berger Project example

> Top position: Further

> Weak position: Divest (or

The definition of core business and "satellites" should be

> Assessment of relatedness of businesses

> Calculation of "economic relatedness" as

Detailed input for concrete synergies measures

Portfolio logic with indication for "role of the center"

Before deciding on portfolio changes, the future "target

Portfolio options should be based on "target performance"

Source: Roland Berger

High level analysis of key

"Optimize Status Quo"

Likelihood of option success

To capture the "target performance" per business, four major

> Do we have the right

> Are we maximising

> Do we have the right

> Are we valued and