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Mc kinsey on cooperatives   how cooperatives grow
Mc kinsey on cooperatives   how cooperatives grow
Mc kinsey on cooperatives   how cooperatives grow
Mc kinsey on cooperatives   how cooperatives grow
Mc kinsey on cooperatives   how cooperatives grow
Mc kinsey on cooperatives   how cooperatives grow
Mc kinsey on cooperatives   how cooperatives grow
Mc kinsey on cooperatives   how cooperatives grow
Mc kinsey on cooperatives   how cooperatives grow
Mc kinsey on cooperatives   how cooperatives grow
Mc kinsey on cooperatives   how cooperatives grow
Mc kinsey on cooperatives   how cooperatives grow
Mc kinsey on cooperatives   how cooperatives grow
Mc kinsey on cooperatives   how cooperatives grow
Mc kinsey on cooperatives   how cooperatives grow
Mc kinsey on cooperatives   how cooperatives grow
Mc kinsey on cooperatives   how cooperatives grow
Mc kinsey on cooperatives   how cooperatives grow
Mc kinsey on cooperatives   how cooperatives grow
Mc kinsey on cooperatives   how cooperatives grow
Mc kinsey on cooperatives   how cooperatives grow
Mc kinsey on cooperatives   how cooperatives grow
Mc kinsey on cooperatives   how cooperatives grow
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Mc kinsey on cooperatives how cooperatives grow

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  • 1. International Summit of Cooperatives How cooperatives grow October 2012Any use of this material without specific permission of McKinsey & Company is strictly prohibitedCopyright © 2012. All rights reserved
  • 2. Executive summary – cooperative growth strategies ▪ From 2005 to 2010, coops grew at nearly the same rate as their publicly held counterparts, but the way coops have grown is different ▪ Coops outperformed publicly listed companies on market share gains, underperformed on portfolio momentum (growth from operating in growing segments), and were roughly on par in M&A (with a focus on mergers rather than acquisitions) ▪ We see two primary opportunities for cooperatives – Play to their natural strengths and further pursue market-share gains by offering value-added products and services that only a coop can deliver. Coops that have outperformed on market share gains and have continued to win the loyalty of members have • Put members first. Coops place their members’ interests and needs ahead of short-term financial gains to win their members’ loyalty and grow the customer base • Used the proximity advantage. Coops can leverage their proximity with members – both physical proximity and close relationships – to tailor products, services, and operations to meet customer needs • Broken down organizational silos. Coops can offer multiple products and services, allowing them to serve more of their members’ needs and increase their members’ benefits and, therefore, grow more quickly. Various units in the organization need to work together to enable these opportunities – Expand in attractive adjacent markets. Coops have a natural tendency to focus primarily on the current interests of their existing members and, to a lesser extent, on expanding in attractive adjacent opportunities. Coops that are good at this do so by evaluating the broader needs of their members in attractive adjacent markets and by bringing targeted modifications to their business models to capitalize on these opportunities. They consistently renew their portfolio by • Understanding unmet needs. Coops must systematically research the unmet needs of their present customer base to be able to effectively explore adjacent markets • Leveraging distinctive capabilities. When exploring adjacent markets, coops can leverage their knowledge, experience, and/or unique expertise to address customer needs in these adjacent markets or new geographies • Using formal mechanisms to finance new opportunities. Coops need to develop mechanisms to ensure investment allocations are available to realize new opportunities McKinsey & Company | 1 Copyright © 2012. All rights reserved
  • 3. ContentContext and methodologyCooperative growth strategies McKinsey & Company | 2 Copyright © 2012. All rights reserved
  • 4. We set out to answer three main questions How important is growth? How significant is growth? How do coops grow? McKinsey & Company | 3 Copyright © 2012. All rights reserved
  • 5. 64 cooperatives in the 4 major sectors were included in our research Europe North America ▪ Achmea ▪ MACIF ▪ BPCE ▪ Rabobank ▪ Debeka1 ▪ R+V Versi- ▪ Crédit Agricole1 ▪ RZB1 ▪ Nationwide Mutual ▪ CoBank1 ▪ Folksam cherung1 ▪ Crédit Coopératif ▪ SNS REAAL1 ▪ SSQ Financial Group1 ▪ Desjardins ▪ GEMA ▪ Unipol ▪ Crédit Mutuel1 ▪ The co-operative ▪ State Farm Mutual1 ▪ Vancity ▪ DZ Bank Group1 ▪ Groupama1 ▪ National Associaton of Cooperative ▪ The Co-operators ▪ Thrivent Lutherian Savings & Credit Unions (Poland) Ace Hardware Agropur ▪ Conad1 ▪ Lega Delle ▪ ▪ ▪ EMMI1 Mountain Equipment Co-op American Crystal Sugar ▪ Coop Estense1 Cooperative ▪ ▪ ▪ HaGe Kiel1 True Value Corporation1 Company1 ▪ Coop Italia ▪ Migros1 ▪ ▪ Südzucker1 Unified Grocers1 Farmers Cooperative Co. ▪ Co-op Schleswig- ▪ Mondragon ▪ ▪ ▪ FrieslandCampina United Farmers of Alberta1 La Coop fédérée Holstein1 ▪ NOWEDA eG1 ▪ ▪ ▪ Agravis Raiffeisen1 ▪ E. Leclerc1 ▪ REWE Group1 ▪ BayWa AG1 ▪ Edeka Zentrale AG1 ▪ The co-operative Insurance Retail Integrated financialsEmerging markets Food and Agricultureand Asia ▪ Arabia1 ▪ LARS ▪ Saraswat Bank1 ▪ Co-operative Insurance ▪ NTUC Income ▪ The Norinchukin Bank1 Company of Kenya ▪ Zensorai ▪ Indian Farmers Fertiliser ▪ Capricorn ▪ FairPrice1 ▪ CBH Group Cooperative (IFFCO)1 Quantitative analysis only McKinsey & Company | 4 Copyright © 2012. All rights reserved
  • 6. To conduct our analysis, we leveraged an established McKinsey method,“The Granularity of Growth,” which explains the gap between coops andthe market by deconstructing growth into its key drivers Growth drivers Market share gain ▪ Organic growth due to better execution or a better value proposition than competition Organic growth Portfolio momentum ▪ Growth of segments and Total geographical areas where growth the company operates Mergers and acquisitions Inorganic growth ▪ Growth relating to acquiring other companies McKinsey & Company | 5 Copyright © 2012. All rights reserved
  • 7. ContentContext and methodologyCooperative growth strategies McKinsey & Company | 6 Copyright © 2012. All rights reserved
  • 8. Our proprietary survey of coop leaders concluded that while coops are notsubject to short-term market pressure, growth remains a priority to protecttheir members’ interestsImportance of growth to achieving Role of growth in realizing coop executives’coop executives’ strategic objectives mission and strategic objectives Percent Not important, Percent not too important, Being a leader in the market or important to Very 60 and able to protect members’ a degree important interests 4 4 Generating basic economies 53 of scale to remain competitive Having a broader impact on members and 27 their communities 92 Offering a range of Extremely 20 diversified services important McKinsey & CompanySOURCE: McKinsey survey and interviews (N=48 leaders – chairman, CEO, SVP – of coops) | 7 Copyright © 2012. All rights reserved
  • 9. Cooperatives grow at nearly the same rate as the markets in which theyoperate, but important differences exist by geography and sector Annual growth rate,1 2005-10 Cooperatives Percent Market Sectors of activity Geographies 9.1 4.5 Insurance North America 10.5 8.6 Integrated 11.2 financials 11.7 8.9 Europe 7.4 4.7 Retail 5.5 Asia-Pacific 11.4 and emerging Food and 7.7 12.3 countries agriculture 6.4 7.9 7.9 Total Total 8.7 8.7Note: Considering sample size and availability of data, growth numbers within 1% confidence interval 75% of the time1 Analysis based on 47 cooperatives and 54 publicly listed companies; data from 2005-10 McKinsey & CompanySOURCE: Annual reports; McKinsey analysis | 8 Copyright © 2012. All rights reserved
  • 10. Cooperatives grow differently from the markets in which they operate,showing stronger market share gain but lower portfolio momentumAnnualized growth 2005-10, percent Market Cooperatives Spread Comments ▪ Robust coop performance is driven by – A clear focus on current members/clientsMarket share due to membership structure 1.1 2.2 1.1gain – Proximity and knowledge of the market – Strong, widely appreciated social values ▪ The active search for new products andPortfolio markets is not an explicit component of a 5.0 3.3 -1.7 cooperative’s missionmomentum ▪ Cooperatives are often less agile in execution and less prone to innovation ▪ Large variability of success against this leverMergers and between the various players and industry 2.6 2.4 -0.2acquisitions due to – Difficulty in accessing capital – Cultural and structural issues limiting Portfolio momentum and M&A are integration capacity typically the 2 strongest growth drivers – Restrictive acts and regulationsNote: Considering sample size and availability of data, growth numbers within 0.7% confidence interval 75% of the time McKinsey & CompanySOURCE: Annual reports; McKinsey analysis | 9 Copyright © 2012. All rights reserved
  • 11. Insurance and integrated financial cooperatives slightly lag the market,mainly because of their presence in slower growth segmentsAnnualized growth 2005-10, percent Cooperatives Market Market share Portfolio Mergers and gains momentum acquisitions Total 4.8 2.9 1.4 9.1 Insurance 2.1 3.3 5.0 10.5 4.3 3.6 3.3 11.2 Diversified financials 1.1 7.6 3.0 11.7Note: Considering sample size and availability of data, overall growth numbers for each sector is within 0.7% confidence interval 75% of the time; growth numbers within each separate growth lever should be seen as illustrative McKinsey & CompanySOURCE: Annual reports; McKinsey analysis | 10 Copyright © 2012. All rights reserved
  • 12. While retail cooperatives show mixed performance, food and agriculturecoops lead their marketAnnualized growth 2005-10, percent Cooperatives Market Market share Portfolio Mergers and gains momentum acquisitions Total -0.5 3.2 2.0 4.7 Retail -0.6 4.8 1.3 5.5 1.4 3.3 3.1 7.7 Agri-food 2.5 3.7 0.2 6.4Note: Considering sample size and availability of data, overall growth numbers for each sector is within 0.7% confidence interval 75% of the time; growth numbers within each separate growth lever should be seen as illustrative McKinsey & CompanySOURCE: Annual reports; McKinsey analysis | 11 Copyright © 2012. All rights reserved
  • 13. Cooperatives have ventured less often beyond their borders, but thosethat did were able to achieve significant growthAnnualized growth 2005-10, percentCooperatives devote a smaller But the growth of internationalfraction of their activities outside activities is superior to that of localtheir domestic market1 activities Comments Share of international activities in Absolute growth gap between ▪ Geographical portfolio international and local activities of expansion remains Cooperatives cooperatives limited, since it does not seem to always 10 Market be aligned with theInsurance 7.6 35 immediate interests of membersIntegrated 18 ▪ Coops’ growth abroad 6.1financials 29 is more often achieved through 4 acquisitions, aRetail 1.4 growth driver where 21 cooperatives have 28 structural difficultiesFood and 1.3 (with the exception ofagriculture 54 several financials)1 International activities are those outside the country of origin McKinsey & CompanySOURCE: Annual reports; McKinsey analysis | 12 Copyright © 2012. All rights reserved
  • 14. Based on case examples of cooperatives with healthy growth,three opportunities emergeGrowth driver Description Best practices ▪ The coop ownership model provides a competitive 1. Put members first 1 Offer a value-add advantage as coops are better able to understand and 2. Leverage the proximity 2 that only a coop cater to the needs of their members advantage can deliver in ▪ Coops should play to their natural strengths and 3 3. Break down organizational products and further pursue market-share gains by putting members’ silos services interests ahead of financial interests in product and service design and delivery ▪ Portfolio momentum is one of the strongest growth 1. Understand unmet needs 1 drivers for public companies, but it is a challenge for 2. Leverage distinctive 2 Organize to grow coops because of their emphasis on meeting the capabilities in attractive immediate needs of existing members 3 3. Use formal mechanisms to adjacent markets ▪ Coops must fight this natural tendency by putting in place finance new opportunities targeted modifications to their business model that enable growth in adjacent markets that are attractive to their members and/or serve their long-term interests ▪ This strategy represents the most significant growth opportunity for coops ▪ Coops perform similarly to the rest of the market in 1 1. Seek out targets that growth through mergers and acquisitions match members’ needs Purchase a rival to gain market ▪ However, significant variability exists within this driver 2. Assess cultural fit and 2 share given the difficulty in accessing capital, cultural and future governance models structural issues, and restrictive regulations 3. Form alliances 3 McKinsey & Company | 13 Copyright © 2012. All rights reserved
  • 15. Offer a value-add that only a coop can deliver in products and services:cooperative case examples – 1/3Examples of best practices Put member interests ahead of short-term financial gains to win loyalty and grow the member base Case example: NTUC Income ▪ Largest composite insurer in Singapore, active in life 1 Put members first insurance and P&C insurance ▪ Revenues: USD 3.5 billion ▪ In 2006, NTUC Income life insurance market share was 10.9%, in an industry with a reputation for opacity and substandard customer service ▪ In 2007, NTUC Income launched its Cultural Revolution and positioned itself as the “honest” insurer Leverage the ▪ In 2011, NTUC Income launched its Orange Revolution, with a focus on 2 proximity advantage removing customers’ pain and being a game changer in the insurance industry ▪ To enable its revolutions, NTUC Income focused on 3 key pillars – Adopting a new set of values that encompasses the essence of Dynamism, complementing existing Good Values – Becoming a customer-centric organization through offering competitive premiums, managing claims effectively, keeping expenses low, and focusing on customer satisfaction Break down 3 – Mobilizing the organization through a comprehensive branding initiative organizational silos that includes a compelling transformation story with internal initiatives and external advertisements aligned with this story ▪ This strategy helped increase the insurer’s life insurance market share to 17.5% (up from 10.9%) and grow its total income annually by more than 14% since 2007 McKinsey & CompanySOURCE: Interviews with coop leaders; annual reports | 14 Copyright © 2012. All rights reserved
  • 16. Offer a value-add that only a coop can deliver in products and services:cooperative case examples – 2/3Examples of best practices Leverage proximity of members to develop a deeper understanding of customer needs and tailor products/services accordingly Case example: BPCE 1 Put members first ▪ Formed in July 2009 as an alliance of Banque Populaire and Caisse d’Épargne ▪ BPCE Group has 80,000 employees and generates revenues of EUR 23 billion ▪ Proximity is achieved through dense presence in the field, both with multi-brand competition and an extensive network of branches Leverage the – Since the 2009 merger, BPCE has the largest network of branches in 2 Europe proximity advantage ▪ BPCE put in place decision-making and performance management mechanisms that fostered local leadership while leveraging the strength of the group – In the coop’s hiring processes, regional entities have the power to hire key executives but must do so from a pool of candidates that the central organization has qualified Break down – This ensures leaders’ qualities fit with the local members’ and 3 organizational silos customers’ needs, while group standards for the skill profile of the coop’s leaders are maintained ▪ From 2005 to 2010, BPCE generated an annualized organic growth of 10.8% over 5 years, two-thirds of which resulted from market share gain McKinsey & CompanySOURCE: Interviews with coop leaders; annual reports | 15 Copyright © 2012. All rights reserved
  • 17. Offer a value-add that only a coop can deliver in products and services:cooperative case examples – 3/3 Break down silos to better serve members’Examples of best practices needs and increase their benefits through multiple product offerings Case example: The co-operative 1 Put members first ▪ The largest cooperative in the United Kingdom with a strong presence in food retail, banking and insurance services, funeral services, pharmacies, and other services ▪ Revenues (2010): USD 22 billion ▪ The co-operative launched a cross-selling and synergy effort to eliminate silos between divisions at first, and then extended it into a group-wide branding operation Leverage the 2 ▪ The organization launched a group-wide loyalty and branding effort to make proximity advantage customers more aware of all the different products and services it offers ▪ The co-operative’s branding initiative transformed the different logos of the various services into an integrated, recognizable brand ▪ The conversion of the membership card as a loyalty card increased customer benefits of doing more business across service lines – 25% of profits are distributed as dividends to members in proportion to Break down their overall spending 3 organizational silos ▪ This strategy boosted membership, bringing it to 7 million in 2012 from 800,000 in 2005 (36% CAGR) ▪ It also allowed the coop to drive member loyalty, deliver maximum value to its members across all product types, and generate a good deal of organic growth McKinsey & CompanySOURCE: Interviews with coop leaders; annual reports | 16 Copyright © 2012. All rights reserved
  • 18. Organize to grow in attractive adjacent markets: cooperative caseexamples – 1/3Examples of best practices Systematically research unmet needs in the customer base to effectively explore adjacent markets Understand unmet Case example: E. Leclerc 1 needs ▪ E. Leclerc is a merchant cooperative and one of the leading food companies in France ▪ Revenues (2010): USD 49 billion ▪ E. Leclerc leveraged the entrepreneurial nature of its store owners to research the unmet needs of their customer base. Store owners are encouraged to seek out opportunities to make certain markets more Leverage distinctive accessible, for example by reducing prices or improving distribution 2 capabilities ▪ When an opportunity explored by one of these store owners succeeds in providing value to members, it is rapidly scaled up throughout the group ▪ Following this model, E. Leclerc entered the gas distribution market to combat gasoline distribution cartels in the mid 1970s ▪ E. Leclerc focused on serving customers and combating high gas prices Use formal instead of exploiting short-term profit opportunities. It also entered mechanisms to jewellery retailing to make jewelry more affordable to its customer base 3 finance new (under the slogan “Gold for everyone”) opportunities ▪ Using this operational strategy, the company achieved sustained organic growth of 4.4% annually, and today is the largest jewelry retailers in France McKinsey & CompanySOURCE: Interviews with coop leaders; annual reports | 17 Copyright © 2012. All rights reserved
  • 19. Organize to grow in attractive adjacent markets: cooperative caseexamples – 2/3 Leverage knowledge, experience, and/or uniqueExamples of best practices expertise to capitalize on opportunities in new markets/geographies Case example: Rabobank Understand unmet 1 ▪ Rabobank is an integrated financial institution in needs the Netherlands ▪ Revenues (2010): USD 17 billion ▪ Rabobank is a federation of 139 financial cooperatives whose roots are in the Dutch agricultural sector ▪ After an attempt at traditional investment banking in the 1990s, Rabobank made the strategic decision to become a financial leader in the international Leverage distinctive food and agricultural sector 2 It achieved that goal by leveraging the expertise it had developed capabilities ▪ domestically with over 100 years’ presence in the Dutch food and agricultural sector, and by using its knowledge of the cooperative model ▪ Rabobank focused its international growth in cities where large agricultural members were already present and needed banking services, opening offices in those cities to offer banking to those clients and grow organically from there Use formal ▪ Rabobank leverages its cooperative nature to achieve its growth strategy mechanisms to 3 – Its focus on domestic retail banking enabled Rabobank to gain a domi- finance new nant position through a dense network of high-quality points of services opportunities – An entrepreneurial system leverages decentralization to foster new ideas from members, customers, employees, and the community ▪ 36% of Rabobank’s growth is now attributable to its international activities McKinsey & CompanySOURCE: Interviews with coop leaders; annual reports | 18 Copyright © 2012. All rights reserved
  • 20. Organize to grow in attractive adjacent markets: cooperative caseexamples – 3/3 Develop mechanisms to ensure necessary investment allocations for exploring newExamples of best practices markets/geographies Case example: FrieslandCampina ▪ FrieslandCampina is a Dutch dairy Understand unmet cooperative 1 needs ▪ Revenues (2011): EUR 9.6 billion ▪ FrieslandCampina capital management reflects the long-term horizon that is specific to cooperatives. To ensure availability of capital to fuel its long-term growth, FrieslandCampina allocates 50% of its profits as retained earnings while another 20% of its earnings are kept within the organization as non-negotiable member bonds (see below) ▪ This strategy enables the company to have access to a major source of Leverage distinctive capital to finance its growth. In 2010, FrieslandCampina’s member bonds 2 capabilities liability was worth EUR 1 billion ▪ To effective deploy this capital, FrieslandCampina keeps members’ interests at the centre and evaluates all potential investments against 2 metrics – The promise of high profitability so that it can contribute to performance- premium payments for the coop’s member farmers – The promise of higher sales of milk so that it will boost farmers’ income Annual profits Use formal mechanisms to 50% 50% 3 finance new opportunities Retained earnings Redistributed to members 60% 40% Cash dividends Member bonds McKinsey & CompanySOURCE: Interviews with coop leaders; annual reports | 19 Copyright © 2012. All rights reserved
  • 21. Additionally, our research revealed best practices for successful inorganicgrowth through M&A – 1/3 Seek out targets that create strongExamples of best practices synergies with current activities and meet members’ needs Seek out targets that Case example: Achmea 1 match members’ ▪ Dutch insurance cooperative needs ▪ Revenues (2010): USD 33.5 billion ▪ In 2005, Rabobank bought ~25% of Eureko’s shares, of which Achmea is a subsidiary. In return, Rabobank transferred its Dutch insurance subsidiary, Interpolis, to Achmea, creating significant synergies for members ▪ The purpose of the merger was to leverage the strong portfolio of brands and excellent distribution power of the 2 companies, and to 2 Assess cultural fit consolidate its position in the market in order to position the companies for growth while also better and more efficiently serving members’ interests ▪ The new entity’s strategy was to offer targeted and tailored products to clients, in particular high-quality health insurance and P&C at good prices, while benefiting from economies of scale in shared back-office processes ▪ As a first step, Interpolis started offering Achmea’s complementary Form innovative products 3 alliances – Health insurance products were sold through the local Rabobanks starting after the merger in 2005 – Rabobank and Interpolis moved their personnel insurance sourcing to Achmea ▪ The merger created the largest insurance group in the Netherlands McKinsey & CompanySOURCE: Interviews with coop leaders; annual reports, press releases | 20 Copyright © 2012. All rights reserved
  • 22. Additionally, our research revealed best practices for successful inorganicgrowth through M&A – 2/3Examples of best practices Assess the cultural fit of candidates for potential mergers and evaluate future governance scenarios Seek out targets that Case example: FrieslandCampina 1 match members’ needs ▪ Dutch dairy cooperative ▪ Revenues (2011): EUR 9.6 billion ▪ Friesland Foods and Campina had grown amidst the consolidation of local and regional dairy coops and no-payment mergers over the past century. In 2008, they used their experience of past mergers to form a single organization ▪ The final outcome, Royal FrieslandCampina, is considered a state-of- 2 Assess cultural fit the-art merger, which has properly equipped the cooperative for the future, particularly the abolition of the quota system in Europe in 2015. This strategy created the 5th largest dairy organization in the world ▪ As key executives explain, 2 factors played key roles in the success of the merger – A clear mutual understanding of the future of key roles and responsibilities in the new entities – A due diligence on the “fit” of the 2 institutions before the merger Form innovative ▫ Business fit. The 2 companies had highly compatible business 3 models with diversification across product groups and alliances geographies, strong brands, and international scale in research, production, marketing, and sales ▫ Cultural fit. Both organizations shared common cooperative values and focused on maximizing the value of members’ milk McKinsey & CompanySOURCE: Interviews with coop leaders; annual reports | 21 Copyright © 2012. All rights reserved
  • 23. Additionally, our research revealed best practices for successful inorganicgrowth through M&A – 3/3 Form innovative alliances to takeExamples of best practices advantage of benefits of scale without sacrificing autonomy Seek out targets that Case example: LARG 1 match members’ ▪ Alliance of 14 insurance cooperatives and needs mutuals in Latin America ▪ Insurers in small Latin American countries had to deal with difficult operating conditions, for example, a lack of statistics on risk and unusually high latent risks (e.g., homicide rate) ▪ In 2004, 5 mutuals (Columna, Compañía de Seguros, Guatemala; Coop- Seguros, Dominican Republic; Seguros Equidad, Honduras; Seguros 2 Assess cultural fit Fedpa, Panama; and Seguros Futuro, El Salvador) formed a group to tackle difficulties in buying reinsurance individually. The group has grown to include 14 insurance cooperatives today ▪ LARG enables cooperatives to make collective reinsurance purchases, which reduces risk (and therefore cost to clients) and boosts sales ▪ The cost of reinsurance has declined by 20 to 30% for cooperatives in the alliance, and LARG is adopting a charter of rights and duties for each member in order to explore new forms of partnership Form innovative 3 LARG’s mission alliances To acquire effective reinsurance and technical capacity in order to promote the development and growth of mutual and cooperative insurers in Latin America through integration and Cooperative Principles McKinsey & CompanySOURCE: Interviews with coop leaders; annual reports | 22 Copyright © 2012. All rights reserved

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