BU Strategic Plan Basics CONFIDENTIAL

DESCRIPTION OF MATERIALS This document was developed as a training presentation for the newly appointed Business Unit CEOs of an Asian Family-owned conglomerate. The purpose of this document is to guide new CEOs through the basic elements of developing a BU-level strategic plan. This presentation is complemented by a companion document the “BU Strategic Plan Template Book” which provides completeness and consistency of BU strategic plan submissions. These templates are not intended to replace or constrain BU strategic thinking and should be adapted to reflect a particular BU’s sectoral context as required

This document was developed as a training presentation for the newly appointed Business Unit CEOs of an Asian Family-owned conglomerate.

The purpose of this document is to guide new CEOs through the basic elements of developing a BU-level strategic plan.

This presentation is complemented by a companion document the “BU Strategic Plan Template Book” which provides completeness and consistency of BU strategic plan submissions. These templates are not intended to replace or constrain BU strategic thinking and should be adapted to reflect a particular BU’s sectoral context as required

WHAT IS A BU STRATEGY? A strong business concept that drives an integrated set of actions that creates value by: Creating products/services whose value exceeds the cost of providing them Capturing value from competitors, customers, distributors, suppliers, and producers of substitute products and services

A strong business concept that drives an integrated set of actions that creates value by:

Creating products/services whose value exceeds the cost of providing them

Capturing value from competitors, customers, distributors, suppliers, and producers of substitute products and services

RATIONALE FOR PROPOSED DEFINITION A strong business concept that drives an integrated set of actions that creates value by: Creating products/services whose value exceeds the cost of providing them Capturing value from competitors, customers , distributors, suppliers, and producers of substitute products and services 1. Recognize dual role of creating and capturing value in all elements of business system 2. Forces choices 6. Competitive 7. Externally oriented, customer driven 4. Recognizes importance of cost as competitive tool 5. Considers tradeoffs between benefit provided to customers and costs they incur 3. Gives consideration to all elements of the business system

A strong business concept that drives an integrated set of actions that creates value by:

Creating products/services whose value exceeds the cost of providing them

Capturing value from competitors, customers , distributors, suppliers, and producers of substitute products and services

COMMON ELEMENTS OF REAL-LIFE STRATEGIES Vision Where? Strong business concept consisting of How to compete? Developed high quality standards and excellent operational procedures Focus on developing critical mass of stores and establishing market dominance McDonald’s experienced phenomenal success in globalization due to: Successfully screening franchisees and a dedication to intense initial and ongoing training Consistent delivery of high-quality food and service around the world Huge economies of scale and powerful supplier leverage Capitalized on “American” appeal of McDonald’s Success in tailoring assortment mix to meet local needs “ We want to be the world’s best quick-service restaurant experience” "We will offer identical excellent quality across the world" Targeting a broad set of the urban population, increasingly offering a bundled product (i.e., meals) at a low price in major cities around the world McDONALD’S EXAMPLE Integrated set of actions

Developed high quality standards and excellent operational procedures

Focus on developing critical mass of stores and establishing market dominance

McDonald’s experienced phenomenal success in globalization due to:

Successfully screening franchisees and a dedication to intense initial and ongoing training

Consistent delivery of high-quality food and service around the world

Huge economies of scale and powerful supplier leverage

Capitalized on “American” appeal of McDonald’s

Success in tailoring assortment mix to meet local needs

“ We want to be the world’s best quick-service restaurant experience”

"We will offer identical excellent quality across the world"

Targeting a broad set of the urban population, increasingly offering a bundled product (i.e., meals) at a low price in major cities around the world

BU STRATEGY REVIEW INTERACTIONS Highly interactive debate driven by fact-based understanding of environment and internal capabilities How do you expect Competitor A to react? How sustainable is your business model? Can it be easily duplicated? How robust are your contingency plans? How quickly can you shift your business emphasis to capture industry opportunities? BU-CEO

BU STRATEGIC PLAN DEVELOPMENT Industry dynamics and implications Environmental and internal assessment Competitive assessment Internal assessment What are the major changes in industry dynamics and resulting opportunities and risks? What are your competitive strengths and weaknesses? How does your current business emphasis fit with industry opportunity and competitive landscape? Strategy articulation Strategic definition and implications Strategic initiatives Financial projections What strategy will your BU pursue over the next 3 years? What will be the impact of major strategic initiatives? What are the expected financial returns of your strategy? + + + + Risk/contingen-cies & strategic alternatives What strategic alternatives have you considered? +

What are the major changes in industry dynamics and resulting opportunities and risks?

What are your competitive strengths and weaknesses?

How does your current business emphasis fit with industry opportunity and competitive landscape?

What strategy will your BU pursue over the next 3 years?

What will be the impact of major strategic initiatives?

What are the expected financial returns of your strategy?

What strategic alternatives have you considered?

INDUSTRY DYNAMICS AND IMPLICATIONS Economics of demand By segment Substitutes, ability to differentiate Volatility, cyclicality Economics of supply Producer concentration and diversity Import competition Capacity utilization Entry/exit barriers Cost structure (fixed and variable) Industry chain economics Customer and supplier bargaining power What are the major changes in industry dynamics and the resulting opportunities and risks? How is industry structure changing with respect to demand, supply, and industry chain economics? What are the resulting opportunities and risks? What is the expected competitor conduct? What are the resulting opportunities and risks? What are the present and future external factors that could present new opportunities and risks? Major industry competitor moves Marketing initiatives Industry capacity changes M&As, divestitures Vertical integration/disaggregation Alliances and partnerships Cost control and efficiency improvements Impact and likelihood of major industry discontinuities Changes in regulation/government policy Technological breakthroughs Key question Sub-questions Issues to be considered* * May or may not be applicable to all BUs What industry are you competing in? What are the various segments in the industry? Industry definition Industry segmentation Definition Sizing

Economics of demand

By segment

Substitutes, ability to differentiate

Volatility, cyclicality

Economics of supply

Producer concentration and diversity

Import competition

Capacity utilization

Entry/exit barriers

Cost structure (fixed and variable)

Industry chain economics

Customer and supplier bargaining power

Major industry competitor moves

Marketing initiatives

Industry capacity changes

M&As, divestitures

Vertical integration/disaggregation

Alliances and partnerships

Cost control and efficiency improvements

Impact and likelihood of major industry discontinuities

Changes in regulation/government policy

Technological breakthroughs

Key question

Sub-questions

Issues to be considered*

Industry definition

Industry segmentation

Definition

Sizing

SEGMENT ANALYSIS ILLUSTRATIVE Industry boundaries Segments Industry segments Relatively distinct sub-groupings within the industry Market is relatively similar within the segment but different across segments Different industry dynamics may vary in importance in different segments

Relatively distinct sub-groupings within the industry

Market is relatively similar within the segment but different across segments

Different industry dynamics may vary in importance in different segments

STRUCTURE-CONDUCT-PERFORMANCE (SCP) MODEL Producers Industry S Technology breakthroughs Changes in government policy/regulations Domestic International Economics of demand Availability of substitutes Differentiability of products Rate of growth Volatility/cyclicality Economics of supply Concentration of producers Import competition Diversity of producers Fixed/variable cost structure Capacity utilization Entry/exit barriers Industry chain economics Bargaining power of input suppliers Bargaining power of customers Marketing Pricing Volume Advertising/promotion New products/R&D Distribution Capacity change Expansion/contraction Entry/exit Acquisition/merger/ divestiture Vertical integration Forward/backward integration Vertical joint ventures Long-term contracts Internal efficiency Cost control Logistics Process R&D Organization effectiveness Finance Profitability Value creation Technological progress Employment objectives External shocks Feedback tructure C onduct P erformance

Technology breakthroughs

Changes in government policy/regulations

Domestic

International

Economics of demand

Availability of substitutes

Differentiability of products

Rate of growth

Volatility/cyclicality

Economics of supply

Concentration of producers

Import competition

Diversity of producers

Fixed/variable cost structure

Capacity utilization

Entry/exit barriers

Industry chain economics

Bargaining power of input suppliers

Bargaining power of customers

Marketing

Pricing

Volume

Advertising/promotion

New products/R&D

Distribution

Capacity change

Expansion/contraction

Entry/exit

Acquisition/merger/ divestiture

Vertical integration

Forward/backward integration

Vertical joint ventures

Long-term contracts

Internal efficiency

Cost control

Logistics

Process R&D

Organization effectiveness

Finance

Profitability

Value creation

Technological progress

Employment objectives

1. Determinants of supplier power Differentiation of inputs Switching costs of suppliers and firms in the industry Presence of substitute inputs Supplier concentration Importance of volume to supplier Cost relative to total purchases in the industry Impact of inputs on cost or differentiation Threat of forward integration relative to threat of backward integration by firms in the industry 2. Determinants of barriers to entry Economies of scale Proprietary product differences Brand identity Switching costs Capital requirements Access to distribution Absolute cost advantages Proprietary learning curve Access to necessary inputs Proprietary, low-cost product design Government policy Expected retaliation 5. Rivalry determinants Industry growth Fixed (or storage) cost/value added Intermittent overcapacity Product differences Brand identity Switching costs Concentration and balance Informational complexity Diversity of competitors Corporate stakes Exit barriers 3. Determinants of buying power Bargaining leverage Buyer concentration vs. firm concentration Buyer volume Buyer switching costs relative to firm switching costs Buyer information Ability to backward integrate Substitute products Pull-through 4. Determinants of substitution threat Relative price performance of substitutes Switching costs Buyer propensity to substitute 2. New entrants 3. Buyers 4. Substitutes Intensity of rivalry 1. Suppliers Price sensitivity Price/total purchases Product differences Brand Identity Impact on quality perception Buyer profits Decision makers' incentives 5. Industry competitors "FORCES AT WORK" FRAMEWORK

1. Determinants of supplier power

Differentiation of inputs

Switching costs of suppliers and firms in the industry

Presence of substitute inputs

Supplier concentration

Importance of volume to supplier

Cost relative to total purchases in the industry

Impact of inputs on cost or differentiation

Threat of forward integration relative to threat of backward integration by firms in the industry

2. Determinants of barriers to entry

Economies of scale

Proprietary product differences

Brand identity

Switching costs

Capital requirements

Access to distribution

Absolute cost advantages

Proprietary learning curve

Access to necessary inputs

Proprietary, low-cost product design

Government policy

Expected retaliation

5. Rivalry determinants

Industry growth

Fixed (or storage) cost/value added

Intermittent overcapacity

Product differences

Brand identity

Switching costs

Concentration and balance

Informational complexity

Diversity of competitors

Corporate stakes

Exit barriers

3. Determinants of buying power

Bargaining leverage

Buyer concentration vs. firm concentration

Buyer volume

Buyer switching costs relative to firm switching costs

Buyer information

Ability to backward integrate

Substitute products

Pull-through

4. Determinants of substitution threat

Relative price performance of substitutes

Switching costs

Buyer propensity to substitute

Price sensitivity

Price/total purchases

Product differences

Brand Identity

Impact on quality perception

Buyer profits

Decision makers' incentives

SWOT ANALYSIS Opportunities/Threats How are demand and supply expected to evolve? How do you expect the industry chain economics to evolve? What are the potential major industry discontinuities? What competitor actions do you expect? YOUR BU CONVERT OPPORTUNITIES BUILD ON STRENGTHS NEUTRALIZE THREATS ADDRESS WEAK-NESSES Strengths/ Weaknesses What are your BU’s assets/competencies that solidify your competitive position? What are your BU’s assets/competencies that weaken your competitive position? Can be used as a thought starter for competitive analysis and internal assessment Surfaces potential opportunities/threats arising from factors external to the BU

Opportunities/Threats

How are demand and supply expected to evolve?

How do you expect the industry chain economics to evolve?

What are the potential major industry discontinuities?

What competitor actions do you expect?

Strengths/

Weaknesses

What are your BU’s assets/competencies that solidify your competitive position?

What are your BU’s assets/competencies that weaken your competitive position?

SCP APPLIED TO LEXMARK Rapidly changing technology, e.g., birth of portable, handheld, wireless computers Rapidly changing customer preferences Possibility of a paperless society given increasing environmental concern and rise of the internet Economics of demand Inkjet printers replacing laser in non-network environment High price sensitivity; minimal opportunity for major product differentiation Growth of laser and inkjet printer markets stable but dependent on PC sales and degree of replacement Economics of supply HP holds lion’s share of printer market Industry capacity exceeds market demand Presence of counterfeit and recycled product supply especially in consumables High exit barriers due to asset intensity Industry chain economics Bargaining power of suppliers low Bargaining power of distributors high Little integration (forward or backward) Marketing Manufacturers competing mainly on price Retail dominant distribution channel Aggressive development and release of new products Moves to increase brand awareness via marketing campaigns Creative financing packages Internal efficiency Relentless drive to low cost manufacturing Continuous efforts to create more specialized features and/or functions Others Entry of PC and peripherals players Clamp down on counterfeit and recycled consumables suppliers Finance Price competition on printer hardware drives margins down and forces players to rely on profits from consumable products (good margins) and high volume capture on hardware S External shocks Feedback tructure C onduct P erformance

Rapidly changing technology, e.g., birth of portable, handheld, wireless computers

Rapidly changing customer preferences

Possibility of a paperless society given increasing environmental concern and rise of the internet

Economics of demand

Inkjet printers replacing laser in non-network environment

High price sensitivity; minimal opportunity for major product differentiation

Growth of laser and inkjet printer markets stable but dependent on PC sales and degree of replacement

Economics of supply

HP holds lion’s share of printer market

Industry capacity exceeds market demand

Presence of counterfeit and recycled product supply especially in consumables

High exit barriers due to asset intensity

Industry chain economics

Bargaining power of suppliers low

Bargaining power of distributors high

Little integration (forward or backward)

Marketing

Manufacturers competing mainly on price

Retail dominant distribution channel

Aggressive development and release of new products

Moves to increase brand awareness via marketing campaigns

Creative financing packages

Internal efficiency

Relentless drive to low cost manufacturing

Continuous efforts to create more specialized features and/or functions

Others

Entry of PC and peripherals players

Clamp down on counterfeit and recycled consumables suppliers

Finance

Price competition on printer hardware drives margins down and forces players to rely on profits from consumable products (good margins) and high volume capture on hardware

RESULTING OPPORTUNITIES AND RISKS FOR LEXMARK Opportunities Risks Become the first mover in printers for portable, handheld, wireless computer market Grow demand base via use of creative, non-traditional channels and alternative financing/payment methods Grow demand for consumables via programs to increase printing usage Be the supplier of printers for PC/peripheral players hoping to the expand into printer market Expand leadership in corporate’ institutional accounts Increasing demand for customization may increase costs and erode margins Any decline in PC sales may significantly bring down revenues Market share may be eroded as competition intensifies Branding/marketing push from established players Pricing push from low-cost manufacturers Margins at risk if printing usage declines with push for paperless society NOT EXHAUSTIVE

Become the first mover in printers for portable, handheld, wireless computer market

Grow demand base via use of creative, non-traditional channels and alternative financing/payment methods

Grow demand for consumables via programs to increase printing usage

Be the supplier of printers for PC/peripheral players hoping to the expand into printer market

Expand leadership in corporate’ institutional accounts

Increasing demand for customization may increase costs and erode margins

Any decline in PC sales may significantly bring down revenues

Market share may be eroded as competition intensifies

Branding/marketing push from established players

Pricing push from low-cost manufacturers

Margins at risk if printing usage declines with push for paperless society

COMPETITIVE ASSESSMENT Privileged assets that create competitive advantage, e.g. physical assets, location/”space”, distribution/sales network Distinctive skills/competencies that create competitive advantage, e.g. innovation, talent development What are your competitive strengths and weaknesses? What are the capabilities required to succeed in this industry? How do you compare against these necessary capabilities? Strengths and weaknesses of your competitive position vs. necessary capabilities Benchmark performance against the industry’s relevant key performance indicators (KPIs), with margin and market share as the required minimum Key question Sub-questions Issues to be considered * KPIs are a handful of levers that drive the value of the industry/business

Privileged assets that create competitive advantage, e.g. physical assets, location/”space”, distribution/sales network

Distinctive skills/competencies that create competitive advantage, e.g. innovation, talent development

Strengths and weaknesses of your competitive position vs. necessary capabilities

Benchmark performance against the industry’s relevant key performance indicators (KPIs), with margin and market share as the required minimum

Key question

Sub-questions

Issues to be considered

CAPABILITY PLATFORM: ASSESSMENT OF SOURCES OF COMPETITIVE ADVANTAGE (1/2) Physical asset Location/"space" Distribution/sales network Brand/reputation Patent Relationship with "license" allocator BHP’s low-cost mines Telecomm/media company with rights radio spectrum Avon’s representatives Coca-Cola Pharmaceutical company with a "wonder drug” "Favored nation" status with a key minister in liberalizing economy Innovation Cross-functional coordination Market positioning Cost/efficiency management Talent development 3M with new products McDonald’s with QSC&V J&J with branded consumer health products Emerson Electric’s Best Cost Producer program P&G brand management program Privileged assets Distinctive competencies Necessary capabilities in order to succeed in the industry Example

BHP’s low-cost mines

Telecomm/media company with rights radio spectrum

Avon’s representatives

Coca-Cola

Pharmaceutical company with a "wonder drug”

"Favored nation" status with a key minister in liberalizing economy

3M with new products

McDonald’s with QSC&V

J&J with branded consumer health products

Emerson Electric’s Best Cost Producer program

P&G brand management program

CAPABILITY PLATFORM: ASSESSMENT OF SOURCES OF COMPETITIVE ADVANTAGE BY SEGMENT (2/2) Step 1: Ensure that these are the capabilities required to succeed in the industry. Use this list as a thought starter, add and delete as you see appropriate BU Overall Segments A B C Step 2: Assess your overall position relative to the capabilities required to succeed in the industry. Also, determine if these capabilities are relevant to the segments you serve Physical asset Location/"space" Distribution/sales network Brand/reputation Patent Relationship with "license" allocator Innovation Cross-functional coordination Market positioning Cost/efficiency management Talent development Privileged assets Distinctive competencies Necessary capabilities in order to succeed in the industry ILLUSTRATIVE Extremely relevant Somewhat relevant Irrelevant

COMPETITOR CAPABILITY COMPARISON BU Overall Competitors A B C Step 3: Compare the strengths and weaknesses of your competitive position vs. the necessary skills Physical asset Location/"space" Distribution/sales network Brand/reputation Patent Relationship with "license" allocator Innovation Cross-functional coordination Market positioning Cost/efficiency management Talent development Privileged assets Distinctive competencies Necessary capabilities in order to succeed in the industry ILLUSTRATIVE

CAPABILITY PLATFORM APPLIED TO LEXMARK Necessary capabili-ties in order to succeed in the industry Privileged assets Distinctive competen-cies Distribution/sales network Brand/reputation Innovation Cross-functional coordination Market positioning Cost/efficiency management Laser Inkjet (Sales network) (Distribution) (Reputation) (Brand) Segments Extremely relevant Somewhat relevant Irrelevant

COMPETITOR CAPABILITY COMPARISON APPLIED TO LEXMARK Necessary capabilities in order to succeed in the industry Privileged assets Distinctive competencies Distribution/sales network Brand/reputation Innovation Cost/efficiency management Lexmark HP Epson          Formed own account teams; customer relationships inherited from IBM Well-established retail distribution/ dealer network Known for quality specialized products and network software Best-known brand Known for product quality Quick to market with new technologies Awarded leader in implementa-tion of necessary product features Leader in print quality Cross-functional coordination delivers superior product design and customer service Market positioning Cross-functional coordination Ownership of technology allows low-cost, in-house manufacture of critical components 

BENCHMARK PERFORMANCE AGAINST RELEVANT INDUSTRY KPIs KPIs (examples) Financial indicators Margin Net income ROCE Operating indicators Advertising effectiveness Utilization rate Strategic indicators Market share Percent of revenue from new products Working capital trend External indicators Market prices of raw materials BU Competitor A Competitor B Competitor C

Financial indicators

Margin

Net income

ROCE

Operating indicators

Advertising effectiveness

Utilization rate

Strategic indicators

Market share

Percent of revenue from new products

Working capital trend

External indicators

Market prices of raw materials

BENCHMARKING APPLIED TO LEXMARK KPIs Financial indicators Operating income Margins ROCE Operating indicators Distribution reach Cycle time Strategic indicators Market share Brand awareness Lexmark HP Epson Strong Medium Weak * Includes other information equipment (e.g. scanners, projectors) $457 million 12% 29% $1,573 million* 9%* 11%* $583 million* 6%* N/A* 12% 47% 17%

Financial indicators

Operating income

Margins

ROCE

Operating indicators

Distribution reach

Cycle time

Strategic indicators

Market share

Brand awareness

INTERNAL ASSESSMENT Relevant BU segments (based on customer, product, geography, distribution channel) Operating contribution estimates for each segment How does your current business emphasis fit with the industry opportunities and the competitive landscape? Which segments of the business are providing the highest returns?* What have been the performance trends along major BU KPIs? KPI performance trends over the last 3-5 years, e.g. return on capital employed (ROCE)**, operating income, margins, capital employed Assessment of underlying trend drivers Expected evolution Key question Sub-questions Issues to be considered Which intangible assets could be near-term sources of value? Identification of in-house intellectual property, talent, networks, brand/image Conversion into sources of value * Based on latest available, 1-2 year historical financial statements ** ROCE = Operating income x (1-tax rate) All interest bearing debt (short and long) + minority interest + stockholders’ equity

Relevant BU segments (based on customer, product, geography, distribution channel)

Operating contribution estimates for each segment

KPI performance trends over the last 3-5 years, e.g. return on capital employed (ROCE)**, operating income, margins, capital employed

Assessment of underlying trend drivers

Expected evolution

Key question

Sub-questions

Issues to be considered

Identification of in-house intellectual property, talent, networks, brand/image

Conversion into sources of value

SEGMENT ANALYSIS Revenue Gross profit Operating profit Assets employed People employed Operating profit margin Gross profit margin ROCE Step 1: Identify the relevant segments Step 2: Provide a segment analysis based on the following minimum financial metrics: revenue, gross profit and margin, operating profit and margin Step 3: To the extent assets and people can be disaggregated by segment, deployment of assets against returns can be analyzed % PhP % of total Segment 1 PhP % of total Segment 2 PhP % of total Segment 3 PhP % of total Segment 4 PhP % of total Total % % % % Segment 1 Segment 2 Segment 3 Segment 4 Total

SEGMENT ANALYSIS APPLIED TO LEXMARK Printers and suppliers Other office imaging Keyboards and other Rest of world Europe US Product Percent Geography Percent of total revenues, 1995 100% = USD 3,807 million 100%= $2494 m 100%=$895 m 11 41 48 6 48 46 100%= $3021 m 100%= $1024 m 14 35 51 8 46 46 100%= $3452 m 100%= $1031 m 14 28 58 40 60 100%= $3807 m 100%= $1164 m 9 23 68 32 67 1 Gross profit Rev 1992 Gross profit Rev 1993 Gross profit Rev 1994 Gross profit Rev 1995 0

TREND ANALYSIS – RETURN ON CAPITAL EMPLOYED (ROCE) The ROCE tree can be disaggregated to show the other relevant KPIs of a BU ROCE Percent Operating income x (1 - tax rate) PhP million Capital employed PhP million ÷ Revenue PhP million Operating margin Percent x (1 - tax rate) Percent x Market share Percent Industry sales PhP million x ILLUSTRATIVE

TREND ANALYSIS – CASH The cash flow tree can be disaggregated to show the other relevant KPIs of a BU Cash flow generated PhP million Operating cash flow PhP million Investing cash flow PhP million + Net income PhP million Non-cash expenses PhP million + Change in working capital PhP million + Financing cash flow PhP million + NOT EXHAUSTIVE

TREND ANALYSIS APPLIED TO LEXMARK ROCE Percent Operating income x (1 - tax rate) USD M Capital employed USD M ÷ Revenue USD M Operating margin Percent x (1 - tax rate) Percent x Market share Percent Industry sales USD M x NOT EXHAUSTIVE

INTANGIBLE ASSET CHECKLIST Intangible assets Ways to extract near-term value Talent Highly motivated and competent workforce leveraging specific skill sets to Generate growth Improve/increase company intangibles Intellectual property Patents generating licensing fees Understanding of customer behavior Risk management Software Network Interconnected webs of parties Non-exclusive Additional member lowers costs, increases benefits Brand/image Inherent image or brand built upon excellent service and product offerings Lower search costs for customers

Intangible assets

Ways to extract near-term value

Talent

Highly motivated and competent workforce leveraging specific skill sets to

Generate growth

Improve/increase company intangibles

Intellectual property

Patents generating licensing fees

Understanding of customer behavior

Risk management

Software

Network

Interconnected webs of parties

Non-exclusive

Additional member lowers costs, increases benefits

Brand/image

Inherent image or brand built upon excellent service and product offerings

Lower search costs for customers

INTANGIBLE ASSET ASSESSMENT APPLIED TO LEXMARK Technology for products Networking software Intangible assets Ways to extract near-term value Customize to suit industry segments currently not served Develop related products that may use networking software in-house or via partnership Sales force engineers Develop the best product to suit identified customer needs Talent Relationship with suppliers Good working relationship allows better capture of production efficiencies that improve product cycle time and cost efficiency Network Intellectual property NOT EXHAUSTIVE

Technology for products

Networking software

Intangible assets

Ways to extract near-term value

Customize to suit industry segments currently not served

Develop related products that may use networking software in-house or via partnership

Sales force engineers

Develop the best product to suit identified customer needs

Relationship with suppliers

Good working relationship allows better capture of production efficiencies that improve product cycle time and cost efficiency

STRATEGY ARTICULATION Where are you going to compete along these dimensions and why: Target market Distribution channels Product (breadth and depth) Geographic scope Target customer definition Benefits that you will offer the customers Product pricing Position against competition vis-à-vis the benefits provided and the price charged Delivery and communication of customer value proposition (value delivery system) Competitive advantage in delivering these benefits to the customer Where to compete? What is your customer value proposition for the different segments you are going to serve? What is your business model? What strategy will your BU pursue over the next 3 years? Key question Sub-questions Issues to be considered Industry attractiveness and implication review Alignment of chosen strategy and environmental realities How does your chosen strategy exploit the industry opportunities and address the industry/competitive threats?

Where are you going to compete along these dimensions and why:

Target market

Distribution channels

Product (breadth and depth)

Geographic scope

Target customer definition

Benefits that you will offer the customers

Product pricing

Position against competition vis-à-vis the benefits provided and the price charged

Delivery and communication of customer value proposition (value delivery system)

Competitive advantage in delivering these benefits to the customer

Key question

Sub-questions

Issues to be considered

Industry attractiveness and implication review

Alignment of chosen strategy and environmental realities

WHERE TO COMPETE? Customers Channels Products Geographic markets Target customers and segments Which customers are you trying to target or attract? Which are you willing to serve, but will not spend resources to attract? Which would you prefer not to serve? How does the entity reach its target customers Which distribution channels will you use? What customer segments can they reach? Geographical scope of business activities Geographic limits to the business? Local, regional, multi-local, national, international, or global player? If local, which localities? Quality and breadth of the product line Breadth of the product line? Quality of the product line? Product bundles or a series of unrelated products?

Target customers and segments

Which customers are you trying to target or attract?

Which are you willing to serve, but will not spend resources to attract?

Which would you prefer not to serve?

How does the entity reach its target customers

Which distribution channels will you use?

What customer segments can they reach?

Geographical scope of business activities

Geographic limits to the business?

Local, regional, multi-local, national, international, or global player?

If local, which localities?

Quality and breadth of the product line

Breadth of the product line?

Quality of the product line?

Product bundles or a series of unrelated products?

WHERE TO COMPETE? LEXMARK EXAMPLE Staged expansion: national, then international Fortune 1000 companies in banking, insurance, retail/pharmacy industries for laser printers Have unique network printing needs Large printer users Value (not price) oriented segments Consumer mass market for inkjet printers Used broadest range of channels for customer freedom Traditional retail channels (i.e., dealer network, value-added resellers, about 5,000 retail outlets) Own account marketing teams to sell direct to customers Laser printers Color inkjet printers Associated consumable supplies MarkVision complete printer management system Customers Channels Products Geographic markets

Staged expansion: national, then international

Fortune 1000 companies in banking, insurance, retail/pharmacy industries for laser printers

Have unique network printing needs

Large printer users

Value (not price) oriented segments

Consumer mass market for inkjet printers

Used broadest range of channels for customer freedom

Traditional retail channels (i.e., dealer network, value-added resellers, about 5,000 retail outlets)

Own account marketing teams to sell direct to customers

Laser printers

Color inkjet printers

Associated consumable supplies

MarkVision complete printer management system

VALUE PROPOSITION A company’s specific promise to its target customers of the benefits it will provide at an explicit price It answer the following questions: Who is your target customer? What are the explicit benefits you provide to your customer? What perceived value do you provide to the customer better than competition? How much value do your customers attach to the benefits you provide?

A company’s specific promise to its target customers of the benefits it will provide at an explicit price

It answer the following questions:

Who is your target customer?

What are the explicit benefits you provide to your customer?

What perceived value do you provide to the customer better than competition?

How much value do your customers attach to the benefits you provide?

LEXMARK'S VALUE PROPOSITION FOR LASER PRINTERS “ We will serve the fast-growing segments of the network printer market with high quality, technologically-advanced products targeted to customer needs at a moderately higher price than undifferentiated laser printers”.

Flash memory allowing instantaneous printing and updating of forms in multiple locations Duplex printing – ability to print on both sides of paper Paper trays to handle three or more sizes of paper and forms Technical service support to help with systems design and product problems TAILOR VALUE PROPOSITION TO VARIOUS CUSTOMER SEGMENTS Targeted to segment needs High quality Technologically advanced Competitive price Slight premium Banking Price Benefits Why choose Lexmark? Slight premium Pharmacy Ability to print prescription labels without jamming (due to spacing of rollers) Technical service support to help with system design and product problems LEXMARK EXAMPLE Segment

Flash memory allowing instantaneous printing and updating of forms in multiple locations

Duplex printing – ability to print on both sides of paper

Paper trays to handle three or more sizes of paper and forms

Technical service support to help with systems design and product problems

Targeted to segment needs

High quality

Technologically advanced

Competitive price

Ability to print prescription labels without jamming (due to spacing of rollers)

Technical service support to help with system design and product problems

BUSINESS MODEL Understand value desires Select target Choose the value Value proposition Design product/ process Procure, manu- facture Distri- bute Provide the value Service Price Define benefits/ price Sales message Communicate the value Business model: Integrated set of actions to provide and communicate the value proposition to customers Segmentation Value proposition Adver- tising Promo- tional/PR Value delivery system (VDS) Each BU must address these 2 issues to define their business model Illustration of how the value proposition will be provided and communicated Identification of existing strengths that can be leveraged and required capabilities that need to be built to be distinctive in chosen value delivery system 1 2

Business model:

Integrated set of actions to provide and communicate the value proposition to customers

Each BU must address these 2 issues to define their business model

Illustration of how the value proposition will be provided and communicated

Identification of existing strengths that can be leveraged and required capabilities that need to be built to be distinctive in chosen value delivery system

LEXMARK LINKED VALUE PROPOSITION TO CHANGES IN BUSINESS SYSTEM Product Design Process Procurement Manu-facturing Distribution Marketing & Sales After-Sale Service Provide the Value Communicate the Value Highly-customized to customer segments 12 month design cycle Fully cross-functional Limited to specific target segments In-house control of critical technologies Outsourced only non-critical components Utilized preferred suppliers Kept high value added processes in-house Improved flexibility and reduced product cycle time Minimized changes in production for new products Multiple channels Small channel sales force Provided incentives to retailers via higher margins Partnerships with key manufacturers for “private label” brands Large sales force targeted at end users in specific industries Sophisticated order fulfillment system Monthly customer index ranking per sales team Retraining to allow more end-user sales approach Dedicated technical people per industry sales group Rapid customer response (<3 hrs) Multiple channels e.g. phone, internet, etc. LexExpress overnight exchange if repair cannot be done Strengths to leverage Capabilities to build Relationships of the account teams with end-users R&D talent Relationships with suppliers Production know-how Relationships inherited from IBM Brand strength Better systems to allow an even smoother flow of information

Highly-customized to customer segments

12 month design cycle

Fully cross-functional

Limited to specific target segments

In-house control of critical technologies

Outsourced only non-critical components

Utilized preferred suppliers

Kept high value added processes in-house

Improved flexibility and reduced product cycle time

Minimized changes in production for new products

Multiple channels

Small channel sales force

Provided incentives to retailers via higher margins

Partnerships with key manufacturers for “private label” brands

Large sales force targeted at end users in specific industries

Sophisticated order fulfillment system

Monthly customer index ranking per sales team

Retraining to allow more end-user sales approach

Dedicated technical people per industry sales group

Rapid customer response (<3 hrs)

Multiple channels e.g. phone, internet, etc.

LexExpress overnight exchange if repair cannot be done

Relationships of the account teams with end-users

R&D talent

Relationships with suppliers

Production know-how

Relationships inherited from IBM

Brand strength

Better systems to allow an even smoother flow of information

STRATEGIC INITIATIVES Financial impact from each strategic initiative Expected financial outlay for each initiative How much value will be created from each strategic initiative? Resources required Availability of resources in the organization Plan for filling resource gaps What resources will each strategic initiative require? What will be the impact of major strategic initiatives? Key question Sub-questions Issues to be considered Possible strategic initiatives list What major strategic initiatives are required to successfully implement your selected business model? Sources of value from each strategic initiative (e.g., EBIT, capital employed) What are the sources of value created from each strategic initiative?

Financial impact from each strategic initiative

Expected financial outlay for each initiative

Resources required

Availability of resources in the organization

Plan for filling resource gaps

Key question

Sub-questions

Issues to be considered

Possible strategic initiatives list

Sources of value from each strategic initiative (e.g., EBIT, capital employed)

STRATEGIC INITIATIVES: SOURCES OF VALUE ILLUSTRATIVE Initiatives (examples) 1. Capture greater market share Volume increase EBIT impact via Price increase Cost reduction Other Invest-ment Capital employed impact via Divest-ment Capital efficiency* Other  2. Cost reduction (e.g., effective channel management) 3. Obtain higher prices 4. Create new market demand 5. Form strategic alliances/ partnerships            * E.g. improved working capital employment, increased asset utilization, changes to asset ownership Sub- initiatives

* E.g. improved working capital employment, increased asset utilization, changes to asset ownership

STRATEGIC INITIATIVES: VALUE QUANTIFICATION ILLUSTRATIVE Estimate of total ongoing operating income and capital employed impact from successful implementation of strategic initiatives Operating income ongoing impact 2001-2004 PhP millions Capital employed ongoing impact 2001-2004 PhP billions Present operating income Volume increase Price increase Cost reduction benefit Additional costs Total ongoing operating income Present capital employed Improved capital efficiency Divestments Acquisitions Total ongoing capital employed one-time operating income impact = one-time costs = + + + – = – – + =

STRATEGIC INITIATIVES: RESOURCING REQUIREMENTS Initiatives Sub-initiatives People/skills Resource requirements Funding Ex-Com involvement 1. Capture greater market share 2. Cost reduction 3. Achieve higher prices 4. Create new market demand 5. Form strategic alliances/partner-ships ILLUSTRATIVE

FINANCIAL PROJECTIONS Key question Sub-questions Issues to be considered Income statement forecast Cash flow forecast What are the key assumptions? What is your projected net income growth in the next few years? What is your expected cash generation ability over the medium term? What is your expected capital productivity? What are the expected financial returns of your strategy? Balance sheet forecast ROCE computation Profit and loss (e.g. revenue, cost, margin) Balance sheet Corporate center directives Corporate center assumptions

Key question

Sub-questions

Issues to be considered

Income statement forecast

Cash flow forecast

Balance sheet forecast

ROCE computation

Profit and loss (e.g. revenue, cost, margin)

Balance sheet

Corporate center directives

Corporate center assumptions

FINANCIAL PROJECTIONS (1/4) ILLUSTRATIVE Business unit assumptions Revenues • Market size • Market share • Price Costs • Input costs • Production costs • Other costs ( e.g. SG&A) Margins • Gross margin • Operating margin Capital • Planned investments/ divestments • Changes in working capital Year 1 KEY FORECAST ASSUMPTIONS Year 2 Year 3 Growth rate Corporate center assumptions Year 1 Year 2 Year 3 Key economic indicators • GDP growth • Consumer price index • Exchange rate ( PhP / USD ) • 91-day T-bill rate Corporate tax rate

FINANCIAL PROJECTIONS (2/4) ILLUSTRATIVE Historical Sales Cost of goods sold Gross profit Operating expenses Operating profit Other expenses Taxes Net profit 1999 FORECASTED INCOME STATEMENT 2000 In PhP million Budget 2001 Forecast 2001 2002 2003 2004 CAGR 1999-2004 Growth analysis Sales (%) Gross profit (%) Operating profit (%) Net profit (%) Margin analysis Gross margin (%) Operating margin (%) Net margin (%) * Key assumptions not listed earlier should be detailed at the bottom of the chart. The impact of planned initiatives on the revenues and costs should be established clearly with additional attachments if required

FINANCIAL PROJECTIONS (3/4) ILLUSTRATIVE Operating profit Depreciation and amortization Other non-cash operating expenses Net operating cash flow Increase/(decrease) in working capital Other operating cash flow Total operating cash flow FORECASTED CASH FLOW STATEMENT Historical 1999 2000 Budget 2001 Forecast 2001 2002 2003 2004 CAGR 1999-2004 * Key assumptions not listed earlier should be detailed at the bottom of the chart. The impact of planned initiatives on the fixed and working capital investments should be established clearly with additional attachments if required Capital expenditure Other investing cash flow items Total investing cash flow Increase/(decrease) in debt Dividends Other financing cash flow Total financing cash flow In PhP million

FINANCIAL PROJECTIONS (4/4) Cash Accounts receivables Inventories Other current assets Total current assets Net fixed assets Other assets Total assets Accounts payable Other current liabilities Total current liabilities Short-term loans Long-term loans Other interest-bearing obligations Other liabilities Total liabilities Minority interest Total stockholders’ equity Capital employed ROCE Total liabilities and stockholders’ equity Ratio analysis Working capital turnover Debt-equity ratio ILLUSTRATIVE FORECASTED BALANCE SHEET Historical 1999 2000 Budget 2001 Forecast 2001 2002 2003 2004 CAGR 1999-2004 In PhP million

RISK/CONTINGENCIES AND STRATEGIC ALTERNATIVES Key question Sub-questions Issues to be considered What are the associated risks to your chosen strategy? Re-examining industry opportunities and industry/competitive threats, what alternatives exist to your chosen strategy? Beyond the 3-year time frame, what breakthrough strategic options may be possible? chosen strategy? What strategic alternatives have you considered? Identification of significant potential risks and plans to mitigate Where to compete? Value proposition Business model Alignment with external realities “ Out-of-the-box” ideas

Key question

Sub-questions

Issues to be considered

Identification of significant potential risks and plans to mitigate

Where to compete?

Value proposition

Business model

Alignment with external realities

“ Out-of-the-box” ideas

STRATEGIC ALTERNATIVES Re-examining industry opportunities and industry/competitive threats, what alternatives exist to your chose strategy? 2. New entrants 3. Buyers 4. Substitutes Intensity of rivalry 1. Suppliers 5. Industry competitors

DEFINITION OF RISKS Definition Risk of loss due to changes in industry and competitive environment, as well as shifts in customer preferences Business risk Risk due to changes in regulatory environment (e.g. deregulation) Regulatory risk Risk due to major changes in technology Technology risk Risk of failures due to business processes and operations or people’s behavior, either intentional (e.g. fraud) or unintentional (e.g. errors) Integrity risk Risk of loss due to changes in the political, social, or economic environments Macroeconomic risk

Risk of loss due to changes in industry and competitive environment, as well as shifts in customer preferences

Risk due to changes in regulatory environment (e.g. deregulation)

Risk due to major changes in technology

Risk of failures due to business processes and operations or people’s behavior, either intentional (e.g. fraud) or unintentional (e.g. errors)

Risk of loss due to changes in the political, social, or economic environments