Example of a ‘problem statement’ and core ‘sub-issues’ to be solved

Key analyses for determining the business opportunity for ‘XXX’
2009

Example of a ‘problem statement’ and core ‘sub-issues’ to be solved
Market/ competitor analysis and novelina positioning Product and customer value proposition Business-model organization and processes required What is the business opportunity for our new product, ‘xxx’? Management team skills and capabilities required Risks and mitigation activities Financial opportunity and returns analysis Implementation road map

Market/ competitor analysis and Novelina positioning Product and customer value proposition Business-model organization and processes required What is the business opportunity for our new product, ‘xxx’? Management team skills and capabilities required Risks and mitigation activities Financial opportunity and returns analysis Implementation road map

SIZE OF XXXXX MARKET € millions 11,000 CAGR 1990-2010 = 16.7% 7,000
4,000 2,000 It is important to understand the history, size, and future growth expectations of the market. This information may come from market research and expert interviews, among other sources. As seen here, the market for novelinas is large and growing. 500 1990 1995 2000 2005 2010(E) * Compound average growth rate Source: …

XXXX DISTRIBUTION CHANNELS, 2006
% Superstores Retail outlets Catalogs Examining various distribution channels shows whether the product might be sold via retail or wholesale outlets and whether the market is consolidated or fragmented. In our example, novelinas are primarily distributed through retail outlets and catalogs. Currently no novelina are sold online, but experience from foars (15% online sales and growing rapidly ) indicates future online sales potential Source: …

DEVELOPMENT OF MARKET SHARE OF XXXXXX
% 1995 2000 2005 Basic product Improved product Even better product Once market size, profit potential, and the channel strategy are understood, market share may be segmented according to product offering. In this particular example, market segmentation indicates a clear trend toward quality upgrading, i.e., over time, consumers have consistently traded up as novelinas have improved. The premium segment of the market is growing. Our novelina Source: …

MARKET RESEARCH FINDINGS – POTENTIAL CUSTOMER NEEDS
% % of population currently owning XXXXX % of population liking their XXXXX Indifferent Don’t own Don't like Own Like Market research proves that while most consumers own and like novelinas, additional customer needs could be identified. Potential needs of novelina users* 'Wish my XXX could …' 'Wish it had more …' 'Need help getting my XXX to …' 'Wish I could buy more XXX within my budget ...' * Quotations from customer interviews Source: …

MARKET RESEARCH FINDINGS – IMPROVEMENT OPPORTUNITIES
Potential customer needs Improvement opportunities 'Wish my novelina could …' Improve novelina ability to do A, B, C 'Wish it had more …' Add options X, Y, Z 'Need help getting my novelina to …' Better instructions Toll-free number 24-hour service 'Wish I could buy more novelina within my budget ...' Scaled down, low-price novelina Cut price on existing novelina Volume discounts Market research also identifies many opportunities for product improvements to meet consumer needs, which provides a basis for tailoring products. These market findings are essential for determining a company’s potential value proposition and should be emphasized. Source: …

WILLINGNESS TO SWITCH TO AN IMPROVED XXXX
% of respondents Would you switch to a nnovelina with improved features ... … at a higher price? … at the same price? … at a lower price? Market research evaluates consumers’ loyalty and price sensitivity. In this slide, market research confirms that consumers will switch to a better novelina even if it’s more expensive. Yes No Yes No Yes No Source: …

KEY FACTORS DRIVING CUSTOMER BUYING DECISION
Rating 5 Unimportant Important Options Customer segment Option lovers Value seekers Service seekers ... Price Market research is also used to identify the key drivers behind consumers’ purchasing decisions. This slide charts three different customer segments: option lovers, value seekers, and service seekers. Various other options, such as specific product features or brand image, can also be graphed to provide a clearer understanding of different customer segments. Customer service Source: …

DEMOGRAPHICS OF TARGET CUSTOMER SEGMENTS
% Demographics Option lovers Value seekers Service seekers Age > 50 Education level High Medium Low Buying behavior Catalogs Superstore To better understand the market, better pinpoint various customer segments, and clarify the company’s value proposition, target customers were segmented in the most basic way – demographics. In this case, customers were segmented first by demographics and then by consumer needs. And as seen here, there are significant differences between the demographics of the three customer segments. Retail Older customers with medium education level shop in superstores and retail outlets Young customers with high education level prefer shopping through catalogs and superstores Mid-aged customers with average education level strongly prefer shopping in retail outlets Source: …

XXXX INDUSTRY FORCES AT WORK
Industry structure and economics Small number of competitors R&D and manufacturing scale effects create barriers to entry Industry profitable Market growing Competitive conduct Competitors crowded out as others upgrade product No price competition Innovation difficult and costly XXX market is an attractive business opportunity Consumer demand Consumer willing to trade up Demand consistently growing No substitutes for novelinas External factors Strong overall economic growth fuels consumer spending Expected legislation changes in 2003 could additional fuel consumer demand Summarizing forces at work offers an industry perspective, including information on competitors, competitive conduct (such as price or innovation), the industry’s structure and economics (such as impending deregulation or the cyclical nature of the industry), external influence (such as the volatility of exchange rates or changes in legislation), and predictions of risk and consumer demand (such as an analysis of upcoming substitute products). This forces-at-work summary shows the novelina market to be an attractive business opportunity. Source: …

MARKET SHARE OF XXXXX COMPANIES, 2006
% Kings novelina Co. Significant barriers for entry into novelina market: high research and development costs and scale requirements XXX companies with old product (e.g., Kings novelina Company) were quickly crowded out of market Wonaby novelina Trinity novelina The market share chart details competitors. Despite high market profitability, only four companies currently produce novelinas. John's novelina Co. Source: …

ANALYSIS OF COMPETITORS
Years since last novelina innovation Current market share Innovation expected Capability to innovate Company Trinity novelina Johns novelina Co. Wonaby novelina Kings novelina Co. 40% 30% 25% 5% 3 5 6 10 Possible No ? EFC's competitors generally are not expected to innovate in the near future Trinity novelina has the highest capability to innovate in the medium future, all other competitors have only low to medium ability to improve their products in response to EFC's novelina The analysis of competitors supports the forces-at-work summary by detailing competitors’ activities. Here, EFC’s competitors are unlikely to innovate their products in the near future. Source: …

COMPETITIVE POSITION EFC vs. COMPETITORS
High Low Skills Strategic assets Special relationship EFC Ability for low-cost production Extensive experience with foar production Novelina patent Well-established brand name for foars Existing relationship with some large national retailers Trinity novelina Cost leader in current novelina production Patent for enhanced novelina Novelina retail chain Johns novelina Co. Very good management resources as part of the Johns conglomerate Strong brand name Patent for enhanced novelina Preferred supplier of medium-sized supermarkets Wonaby novelina CEO left six months ago to Kings novelina Co. Partnership with novelina research lab License to produce enhanced novelina Experimenting with selling novelina online Once a competitor’s market share and analyses have been mapped out, the company’s position can then be detailed and rated on a simple scoring model. This chart shows that EFC has a strong competitive advantage in skills and strategic assets compared with its competition. Kings novelina Co. New CEO Beginning turnaround Old production facilities (cannot be upgraded) De-listed from Wesko supermarket two months ago Source:

SWOT ANALYSIS FOR EFC XXX’S FUTURE BUSINESS
Strengths Low-cost production capability Patent for faster novelina Well-established brand name for foars Weaknesses Currently no experience with online selling No own retail activities No relationship with medium-sized supermarkets EFC Novelina Business Opportunities Fast-growing market: CAGR : 9.5% Profitable market: industry-wide ROS 2005: 15% Customers' openness to innovation of novelina in the past: market share of even-better novelina in 2005: 90% Customers' willingness to switch to fast novelina in the future: 90% Threats Competitive reaction to market entry of EFC, including possibility of price war Competitors leveraging relation-ship to existing distribution channel to block EFC's market entry novelina competitors attacking EFC on its home territory with entry into the foar market Product innovation through Trinity novelina The company’s strengths, weaknesses, opportunities, and threats are then analyzed to validate and support the idea for the product and the specific value proposition. On balance, the strengths and opportunities of EFC’s novelinas’ future business outweigh weaknesses and threats. Source:

Market/ competitor analysis and novelina positioning Product and customer value proposition Business-model organization and processes required What is the business opportunity for our new product, ‘novelina’? Management team skills and capabilities required Risks and mitigation activities Financial opportunity and returns analysis Implementation road map

NOVELINA VALUE PROPOSITION
Customer need Product characteristics EFC value added More options Better performance Lots of service Value for money Emotional styling novelina with Many new options Enhanced performance 24-hour customer service for novelina customers Leveraging experience as low-cost producer of foars to offer novelina at today's market price This chart defines the product’s value proposition in meeting customer need, which comes out of the previously described market research, product characteristics, and added value. EFC’s engineers have developed a patented fast novelina that offers customers an attractive value proposition. Value proposition A better product with more options and an innovative styling at the same price as regular novelina, plus 24-hour customer service Source:

ESTIMATED CUSTOMER SEGMENT DEVELOPMENT, 2002-2006
'000 € CAGR*, % 11,000 12 9,830 8,780 15 7,840 7,000 Option lovers 6 Value seekers The size of the customer segment and its future development are then detailed, optimally with data confirmed by industry reports, predictions, market outlooks, or a market trend analysis. This chart shows a growing novelina market, driven by growth in the option lover segment in particular. 6 Service seekers 2002 2003 2004 2005 2006 * Compound average growth rate Source:

ORGANIZATIONAL STRUCTURE OF EUROPEAN NOVELINA COMPANY
Proposed new business unit CEO CFO COO Head of corp. center Novelina SBU* Great foar SBU After the business model has been solidified, the organizational structure must be determined. Key questions include: Will this business be structured as a startup within a larger organization? As a business unit, should it operate as an independent company that, after initial startup funds from the parent company, can then be brought to the capital market? Should a division approach or a business unit approach be taken? In our example, EFC should create a separate strategic business unit (SBU) with its own profit and loss statement. * Strategic business unit Source:

ORGANIZATIONAL STRUCTURE OF NOVELINA BUSINESS UNIT
Novelina SBU Manufacturing Sales and marketing Customer service Systems support/ back office The organizational structure also breaks down the company, as necessary, into business units such as manufacturing, sales and marketing, customer service, and systems support. Various aspects may be outsourced, particularly when a parent company is involved. In our example, the SBU should be organized along four key processes: manufacturing, sales and marketing, customer service, and systems support/back office. Source:

CORE PROCESSES – MANUFACTURING
Develop product Produce product Package product Ship product Key activities Research and develop product innovations Understand customer needs Test/pilot new product innovations Purchase raw materials Operate plant Control quality of output Improve production flow Develop package design Package product Develop innovative promotion format Control quality of output Store bulk product Load transport vehicles Track orders and shipments Skills Strong R&D, tied to marketing TQM* Purchasing Cost control Efficient plant operations Cost control Quality control Efficient packaging/ loading Transport deployment Core processes and their roles and responsibilities should be clearly defined. This slide for manufacturing core processes and the following slides for core processes in sales and marketing, customer service, and systems support provide a high-level overview of key activities. These activities may be broken down further using a typical ICADE model – information, consultation, approval, decision, and execution. EFC will need to hire 56 full-time equivalents (FTE) with skills ranging from cost control and efficient plant operations to transport deployment. Staffing FTEs 2 34 10 10 * Total quality management Source:

CORE PROCESSES – SALES AND MARKETING
Understand customer needs Develop marketing strategy Develop sales strategy Sell to customers Bill customers Key activities Perform market research Surveys Question-naires Sales rep feedback Gain in-depth consumer understanding Define product positioning Develop ad/promotions strategy and implementation concept Prioritize potential outlets Develop account plans Negotiate sales with retailers Conduct pricing analysis Close contracts Send bills Process payments Skills Quantitative/ analytic analysis of data Communi-cation Advertising expertise Marketing expertise Sales expertise Customer relations Communi-cation Negotiation Pricing analysis Sales experience Accounting skills EFC will need to hire 53 FTEs with strong market research, advertising, and sales skills. Staffing No. of FTEs 2 5 5 37* 4 * Including 35 field sales managers Source:

CORE PROCESSES – CUSTOMER SERVICE
Maintain account relationships Operate phone center Respond to customer concerns Key activities Select accounts to focus on Develop account plans Schedule account visits Visit/call on accounts Schedule 24-hour shifts Train operators Monitor calls Advise over phone Send service reps to customer Operate in-house service center Skills Account planning Customer relationship management Communication Technical knowledge Operations efficiency Communication Technical knowledge Repair and maintenance know-how To provide 24-hour customer service, EFC will need staff of 103 customer service personnel. Staffing No. of FTEs 5 8 90 Source:

CORE PROCESSES – SYSTEMS SUPPORT/BACK OFFICE
Design systems Operate systems Service systems Provide back-office support Key activities Understand needs of manufacturing, sales, and customer service areas Design support systems to meet their needs Run day-to-day computer systems Run help desk Advise with technical support Service malfunctioning systems Repair equipment Provide secretarial support to manufacturing, sales, and customer service Provide legal advice Provide accounting services* Skills Systems expertise Software design Programming skills Technical skills Communication Equipment repair Secretarial skills Legal Accounting EFC will need to hire 24 FTEs with systems experience and secretarial, legal, and accounting skills. Staffing No. of FTEs 5 5 4 10 * Partly outsourced Source:

NOVELINA BUSINESS UNIT STAFF POSITIONS
Head of novelina SBU (1) FTE ( ) SVP of manufacturing (1) SVP of sales and marketing (1) SVP of customer services (1) SVP of systems/ back office (1) R&D specialists (2) Sales reps (35) Major account reps (5) Information technology (14) Plant personnel (50) Service mechanics (90) Human resources (6) Advertising and marketing specialists (12) Quality control engineers (4) Market researchers (2) Legal (2) Once business strategy, overall organization, and processes and their related activities have been clarified, the number of necessary employees is determined. In our example, total staffing after five years, including the head of fast novelinas SBU and five senior vice presidents, will be approximately 241 people. Phone reps (8) Billing coordinators (4) Finance (2) Source:

DEVELOPMENT OF KEY FINANCIALS, 2007-2012
BASE CASE Revenue EBIT ROS RONA % € millions -144 -51 1,162 6,785 1,847 65 2007 2009 2012 2007 2009 2012 67 17 -222 -3 -178 -17 The four key financial parameters to be reviewed over five years are revenue, EBIT, return on sales, and RONA. Driving these best-case and worst-case scenarios are assumptions regarding target market share, manufacturing costs, overhead needs, competitor reaction, and other similar variables which must be determined on a case-by-case basis. For our company, revenues are expected to grow from €65 million in 2001 to €6,785 million in 2005. 2007 2009 2012 2007 2009 2012 Source:

FIVE-YEAR PROJECTION OF PROFIT AND LOSS STATEMENT
BASE CASE € millions 2007 2008 2009 2010 2011 Revenue Expenses % of revenues Cost of goods sold % of revenues Marketing and sales % of revenues Administration % of revenues R&D % of revenues EBIT % of revenues Interest Taxes Net income % of revenues 65 209 322 81 125 55 85 30 46 43 66 -144 -222 3 -147 -226 513 626 122 348 68 152 30 58 11 14 -113 -22 8 -121 -24 1,847 1,898 103 1,182 64 362 20 165 9 189 10 -51 -3 12 -63 3,887 3,510 90 2,295 59 617 16 305 8 293 378 10 12 5 361 9 6,785 5,623 83 3,891 57 963 14 480 7 424 6 1,162 17 12 340 793 Key financials are then broken down into a five-year profit and loss statement. This statement relies on specific cost drivers. For example, does the finance department need five or six people? What are their specific tasks? How do those tasks evolve over time? How many people, for example, can one payroll clerk service, and when must a second be added? The following four pages are examples of the subsequent five-year financial analyses that must be performed. In our example, after four years of operation, the net income turns positive . . . continued next page Source:

FIVE-YEAR PROJECTION OF CASH FLOW STATEMENT
BASE CASE € millions 2007 2008 2009 2010 2011 Cash year in 4 33 31 236 Sources of cash Net income: Depreciation (amortization) Increase/decrease in Trade and other payables Employee benefit liabilities Deferred tax liabilities Long-term debt and loans -147 8 5 50 -121 12 16 3 80 -63 19 23 6 50 361 85 36 8 1 793 103 49 9 84 Total sources of cash -76 -10 +35 491 1,038 Use of cash Increase/decrease in: Trade and other receivables + Inventories Fixed assets Interest 14 38 3 15 54 12 8 3 62 24 12 16 156 83 12 35 227 155 12 48 . . . and the break-even point is reached. Total use of cash Increase/decrease in cash Financing (increase of equity) 70 -146 150 77 -87 120 114 -79 110 286 205 442 596 Cash years out 4 33 31 236 832 Source:

FIVE-YEAR PROJECTION OF BALANCE SHEET – ASSETS
BASE CASE € millions 2007 2008 2009 2010 2011 Current assets Liquid assets Trade and other receivables Inventories Total current assets 4 14 15 33 54 8 46 81 33 68 18 119 101 20 81 183 31 130 34 195 152 39 113 299 236 286 69 591 279 124 155 751 832 513 117 1,462 509 227 282 1,744 Fixed assets Gross value Accumulated depreciation Total fixed assets Total assets Over the five-year forecast period, assets grow by a factor of roughly 20. Source:

FIVE-YEAR PROJECTION BALANCE SHEET – LIABILITIES AND EQUITY
BASE CASE € millions 2007 2008 2009 2010 2011 Current liabilities Trade and other payables Employee benefit liabilities Deferred tax liabilities Total current liabilities 8 5 13 24 8 32 47 14 61 83 22 1 106 132 31 85 248 Long-term liabilities Long-term debt and loans Total long-term liabilities Total liabilities 50 63 130 162 180 241 180 286 180 428 Equity Over the five-year forecast period, equity and liabilities grow by a factor of roughly 20. Share capital Retained earnings Total equity Total liabilities and equity 150 -132 18 81 270 -249 21 183 380 -271 109 299 380 85 465 751 380 936 1,316 1,744 Source:

PROJECTION OF EBIT, ROS, AND RONA, 2007-2012
BASE CASE EBIT € millions ROS % RONA % EBIT, ROS, and RONA increase dramatically from 2001 to 2005. Source:

BUSINESS EVALUATION THROUGH DCF* METHOD
8,938 € millions 1,162 BASE CASE NPV of free cash flows is € 4,653 million 378 -51 -144 -113 Residual value** The net present value is derived from a discounted cash flow methodology. This process shows that this is a favorable investment. In the base case, the NPV of the free cash flows is €4,653 million. 2008 2009 2010 2011 2012 Discounting rate % 30 27 24 21 18 15.5 * Discounted cash-flow analysis ** Last year’s cash flow with yearly growth rate of 2.5% discounted by 15.5% Source:

DESCRIPTION OF CASES Worst case Competitors (Trinity novelina, Wonaby novelina) developing novelina in two to three years Market growth limited (3%) Price war driving down market price by 10%-15% Base case Development as expected Best case Market exit of Kings novelina company Market growth exceeding expectations (15%-20%) mainly driven by introduction of novelina Price discrimination for option levers by 10% The worst case, best case, and the median realistic case scenarios are defined. Here three scenarios describe possible future market and business developments. Source:

COMPARISON OF EBIT, ROS, AND RONA BETWEEN CASES
Worst case Base case Best case EBIT € millions 2,014 1,162 512 24 ROS % 17 5 EBIT, ROS, and RONA are all calculated for each of the three scenarios. In this scenario, EBIT, ROS, and RONA are all driven by fictitious assumptions. In reality, however, it is important to provide specific and detailed assumptions. In 2005, EBIT is between €512 million and €2,014 million (with a parallel growth in ROS and RONA) for our sample company. 85 67 RONA % 32 Source:

BUSINESS EVALUATION THROUGH WEIGHTING CASES
DCF € millions Probability % Base case 4,653 Value of EFC's novelina SBU €4,008 million Worst case -138 Best case 6,221 The probabilities behind each case are then discussed, and from this a credible average discounted cash flow may be derived. Best case leads to a positive cash flow of €6000 million, whereas worst case leads to a modestly negative discounted cash flow, which indicates that the overall five-year risk is limited. Source:

IMPLEMENTATION ACTION PLAN AND TIMELINE
Month Activity J F M A M J J A S O N D Finish final product development Set up business unit Hire new staff Train new staff Begin production Develop marketing strategy/ads campaign Begin ads campaign/ sales rep visits Roll out novelina Start up customer service phone center The implementation road map provides a detailed course of action for moving from the initial business plan to the actual retail distribution of the product or the start of trading. An actual implementation plan runs about 10 pages and discusses the various necessary activities and their respective timelines in detail. In our example, EFC must act quickly to get the fast novelina to market and begin capturing market share. Send out account reps Follow up surveys with early customers Fine-tune product Source:

Example of a ‘problem statement’ and core ‘sub-issues’ to be solved

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