C O N F I D E N T I A L | The Upside The 7 Strategies for Turning Big Threats Into Growth Breakthroughs October 27, 2010 Adrian Slywotzky

2 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Value Migration ® $ BB US Steel Nucor Sears Wal-Mart Compaq Dell Motorola Nokia

3 AJS CIRT, Santa Fe.ppt © Oliver Wyman  No profit zone: Airline industry example Industry Net Profit Net Profit (1995 $BB) Source: Air Transport Association of America.

4 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Evolving no profit zones  Airlines  Consumer Electronics  PCs  Homeowner’s Insurance  Cars  Beverage in Grocery  Films  Agriculture  Environmental Remediation  Lots of Manufacturing

5 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Customer priorities trajectory 2005 Customer Priorities Customer Priorities Customer Priorities

6 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Type 3 Type 1 Type 2 Convenience store Local grocer Large regional chains Convenience store Local grocer Large regional chains Convenience store Restaurants National chains Hotel chains Office buildings Local organizations Hotel chains Office buildings Local organizations Taste Price Availability BottlerGrocerFountainVendingConsumer Local franchise Regional Large, sophisticated, business- driven Coca-Cola: Multiple customer thinking

7 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Supplier Power Index Differentiated Moderately concentrated50/50 Unique Highly fragmented90/10 Pure commodityHighly concentrated10/90 Strongly differentiated Fragmented70/30 Weakly differentiated Concentrated30/70 ProductCustomers Suppliers/ Customers

8 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Profitability Market Share Chrysler Ford GM Automotive – 1970s

9 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Automotive – 1990 Chrysler Ford GM Market Share Profitability

10 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Automotive – 2002 Chrysler GM Profitability Market Share Ford

11 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Automotive – 2008 Chrysler Ford GM Profitability Market Share

12 AJS CIRT, Santa Fe.ppt © Oliver Wyman  No-Profit Zones  Cars  Consumer electronics  Music  Newspapers  Grocery  Telco networks

13 AJS CIRT, Santa Fe.ppt © Oliver Wyman  My business design Customer Selection Profit Model Strategic Control TodayNext Scope Unique Value Proposition

14 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Business Design Example: Airline Industry Within a particular industry, companies may pursue very different Business Designs UnitedSouthwest International & domestic; coach, business and first- class travelers Broad network & loyalty program Customer Selection & Value Proposition Domestic travelers; coach only Low-cost, no-frills w/ highly consistent customer service Tiered fares based on class, flexibility Ancillary revenues Value Capture/ Profit Model Every-day low prices High asset utilization Sophisticated IT International Sales & Regulatory capability Organizational Systems Cultural emphasis on Southwest way Global hub-and-spoke route system ScopeUS-only point-to-point route system Controlled-access airports in key geos Loyal frequent fliers Strategic ControlLowest costs High frequency route coverage Southwest Next? $10BB$16BBRevenue $4.7BBMarket Cap$10BB

15 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Industry Risk

16 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Compete/collaborate: Timing Industry profit margin Collaboration should begin Collaboration begins Change the compete/collaborate ratio soon enough to make a difference

17 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Compete/collaborate: Ratio Compete Collaborate

18 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Compete/collaborate Too late?  Textiles  Apparel  Steel  DRAMs  Consumer electronics  Music Still in play?  Utilities  Cars  Chemicals  Hollywood  Pharma  Computing  Aerospace  Airlines?

19 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Current Economic Situation – A Short Recap

20 AJS CIRT, Santa Fe.ppt © Oliver Wyman 

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22 AJS CIRT, Santa Fe.ppt © Oliver Wyman  The Bermuda Triangle SavingsIncome Debt

23 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Total HH debt to total HH income Total HH debt includes: Mortgage debt, home equity debt, non-revolving consumer credit and revolving consumer credit. Source: Federal Reserve Board. 70% 113% 165%

24 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Percentage Source: Bureau of Economic Analysis Personal savings as a percent of disposable personal income

25 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Of the roughly 130 million jobs in the U.S., only 20 percent pay more than $60K a year, while the remaining 80 percent average $33K. >$60,000 a year $33,000 a year

26 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Average U.S. unemployment rate Source: United States Department of Labor, Bureau of Labor Statistics ?

27 AJS CIRT, Santa Fe.ppt © Oliver Wyman  The “Seven-Lean Years” Economy?

28 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Before reaching for the bottle of antidepressants …  The tale of two economies  Turnaround breakthroughs  Next Generation business design

29 AJS CIRT, Santa Fe.ppt © Oliver Wyman  The Tale of Two Economies

30 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Four-Chain World

31 AJS CIRT, Santa Fe.ppt © Oliver Wyman  The Four-Chain World Technology Media/Content/Advertising Telco Consumer Electronics

32 AJS CIRT, Santa Fe.ppt © Oliver Wyman  The Four-Chain World Consumer Jennifer Stone: 50-year-old, Small Business Owner

33 AJS CIRT, Santa Fe.ppt © Oliver Wyman  The Four-Chain World Consumer Jennifer Stone: 50-year-old, Small Business Owner

34 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Bloomberg: Simplifying the Trader’s Hassle Map Easy to manipulate: access and downloading Sleek dual- screen terminal Single comprehensive platform With Bloomberg: Data comparison/ download problems Incomplete information Many screens and computers A la carte pricing Multiple logins Multiple connections/ subscriptions Without Bloomberg: It takes time and is expensive to connect to up to 200 exchanges, communicate with thousands of brokers, subscribe to countless news and research sources, and hook up voice communication Accessing each exchange and each news source takes time, and I need data that is current up-to-the-second It’s hard to keep track of what everyone charges, and it’s expensive to buy data access and services a la carte To see all of the data at once I need to have a bunch of computers and screens at my desk. Best alternative is to toggle between windows, which takes time No matter how much research I do or how many people I talk to, I’m never sure if I have as good and as current market information as our competitors do Some data pricing information is not comparable across sources and not all of the data I have can be easily downloaded into Excel for additional analysis

35 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Hassle Map

36 AJS CIRT, Santa Fe.ppt © Oliver Wyman  A Far Better Deal for the Customer

37 AJS CIRT, Santa Fe.ppt © Oliver Wyman   High growth  Premium price  Stronger allegiance

38 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Value Migration 2001 Value2009 Value $2.0 trillion$1.5 trillion Note: Bloomberg numbers are estimates since company financial data is not released. 21 Leaders $24 billion$503 billion7 cross-chain players 2%25%Share of value

39 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Turnaround  Focus  Mindset  Energy

40 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Turnaround successes  Apple  Autodesk  Best Buy  Burberry  Colgate  Continental AG  Eastman Kodak  Fiat  Ford  Harrah’s  Hewlett Packard  Hyundai  IBM  Kellogg's  LG Mobile  Morrisons  Nissan  Porsche  Samsung  Volkswagen  Xerox

41 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Can you reverse a no-profit zone?

42 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Value Added Price In the Same WayDifferently Compete Compete On

43 AJS CIRT, Santa Fe.ppt © Oliver Wyman  ROIC vs. Growth for Top U.K. Grocers, ROIC (%) Growth (%) Tesco Sainsbury’s Morrisons Sources: Morrisons 2009 Annual Report; Tesco year record; Sainsbury 5 year record; Compustat Global Vantage

44 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Customer Perception Map North American grocery retailers Excellent HighLow Poor Price Offer Perception

45 AJS CIRT, Santa Fe.ppt © Oliver Wyman 

46 AJS CIRT, Santa Fe.ppt © Oliver Wyman  TWO No-Profit Zones  Memory chips  Consumer electronics

47 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Sony vs. Samsung Sony $BB

48 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Sony vs. Samsung Sony $BB

49 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Sony vs. Samsung Sony $BB

50 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Sony vs. Samsung Samsung Sony $BB

51 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Ford stock price: 2007 to 2010 Source: Yahoo! Finance. Price Date

52 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Value chain profitability EBIT Source: Annual Reports, Compustat, Analyst Reports. Note: Operating margin on net value added revenue. Auto Mfg. Tier 1New Car Sales Used Car Sales Fin. Leasing Ext. Warr. Ins. Parts Mfg. Add-On Prdct. Mfg. Take-Care Prdct. Mfg. Parts Ret. Svcs. & Repair Energy Rental Fleet Mgmt.* Veh. Utility

53 AJS CIRT, Santa Fe.ppt © Oliver Wyman   How much to collaborate?  How much to improve the customer experience?  How much turnaround energy to tap?  How quickly can I evolve my business design?

54 AJS CIRT, Santa Fe.ppt © Oliver Wyman  My business design Customer Selection Profit Model Strategic Control TodayNext Scope Unique Value Proposition

55 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Which would you prefer? Business Design “A” $10 billion $50 million Business Design “B” $8 billion $300 million Revenue Profit

56 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Value Added Price In the Same WayDifferently Compete Compete On

57 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Vision of Next Decade?  Capacity  Compete/Collaborate Ratio  Creative Business Design –Compare: ­To other companies ­Today vs. 5 years ago ­Hassle map ­Revisit value chain ­Resource-sharing

58 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Value Added Price In the Same WayDifferently Compete Compete On

59 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Creative Business Design

60 AJS CIRT, Santa Fe.ppt © Oliver Wyman  The Customers’ Total Economic Equation “Big Box” Systems economics Product “Little Box”

61 AJS CIRT, Santa Fe.ppt © Oliver Wyman  My Little Box/Big Box  What more should I sell?  What economic problems should I solve? My Product

62 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Demand Matrix – Benefits and Buyers Purchasing Agent Product Functionality Cut Costs Cut Capital Reduce Errors Cut Cycles Greater Differentiation More Sales EngineerPlant Manager Business Manager Function Head C-level Executive Viewing the customer through an economic lens

63 AJS CIRT, Santa Fe.ppt © Oliver Wyman  My Product “Big Box” Consumer “Big Box” “Little Box” Convenience Reduced Uncertainty Plannability Excellent Experience Information Great Service Time Savings Reduced Hassle More Options Faster Response Easier on Budget Peace of Mind Personalization Affinity Health/Wellness

64 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Using hidden assets to create new value for customers DoorsInstrument Panels InteriorsElectronics Integration Design Engineering R&D Testing Market Research Seats Manufacturing Market position: Johnson Controls

65 AJS CIRT, Santa Fe.ppt © Oliver Wyman  DoorsInstrument Panels InteriorsElectronics Integration Design Engineering R&D Testing Market Research Seats Manufacturing Using hidden assets to create new value for customers 3% 15% Market position: Johnson Controls

66 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Johnson Controls: Financial performance Source: Compustat. CAGR: 14%CAGR: 10% $BB Revenues Market Value $MM Operating Income $BB CAGR: 18%

67 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Johnson Controls: Market value vs. components suppliers Johnson Controls Average of Components Manufacturers 1 Indexed Market Value (1995=100) Indexed Market Value Source: Compustat., Data are for January of the year indicated. 1 Arithmetic average of the following companies: Intermet, Superior Industries, Modine Mfg, Tomkins PLC, Dana Corp, Eaton Corp.

68 AJS CIRT, Santa Fe.ppt © Oliver Wyman  JCI Customer selection  Purchasing agent  Senior managers Value proposition  Low-cost components  High quality  Lower fixed cost –Design staff –Capital equipment  Lower inventory  Lower system cost  Faster response Profit model  Gross margin  Multi-year/program contract Scope  Parts  Systems Strategic control  None  Senior management relationship/information flow  Comfort Labs –Proprietary information Organization structure  “Manufacturer”  “Solutions provider”

69 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Air Liquide: Putting hidden assets to work (1991 to 2001) HazMat expertise Process/energy expertise Gas production expertise Hidden Assets Leveraged: 1 For Semiconductor Fabs only, following acquisition of TI’s chemical operations. Raw Material Cost & Supply Supply Chain Effectiveness Energy Costs Production Costs & Asset Maintenance Safety & Environmental Risk Reduction Supply of Gas raw materials IT systems: Tracking/Supply Chain, Remote Monitoring, … Energy efficiency & on-site waste-gas electricity generation Management of other production processes Management of all Gas (& Chemical) production processes Management of on-site Gas raw material distribution

70 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Air Liquide’s services strategy helped fuel strong growth Year Three-year rolling annual growth rate Revenues Operating Profit

71 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Tetra Pak

72 AJS CIRT, Santa Fe.ppt © Oliver Wyman   Refrigeration  Logistics  Handling  Storage

73 AJS CIRT, Santa Fe.ppt © Oliver Wyman   800 design and development specialists  3,000 food processing and packaging experts (engineers, microbiologists, etc.)  Living with the customer

74 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Tetra Pak: “Life Cycle Partnership” means long-term customer relationships Employing more than 3,000 food processing and packaging experts, Tetra Pak helps reduce costs along the entire value chain from manufacturing to retail  Determine food packaging and performance objectives: –Product quality –Liters of output per hour –Sustainability targets  Select machinery and packaging  Provide equipment financing  Management training –15 “Train the Trainer” centers  Increase employee productivity with professional development to maximize availability of equipment –Human error accounts for most equipment failure  Determine distribution requirements : –Shipping frequency and method –Wholesale and retail shelf space –Weight constraints  Test machinery and factory process flow  Quality testing with distributors  Hone product quality  On-site operational and maintenance training  Optimize parts inventory management –4 distribution centers for parts  Optimize QC: Who does what to what equipment, when and how –Access to 65 tech service centers  Periodic factory review to avoid “if it ain’t broke, don’t fix it”- mentality Source: Wholesale and retail distribution process flow Equipment maintenance and parts Operational fine-tuning & process flow Installation & start-up Equipment selection & financing Supply chain analysis Channel selection Operational trainingStart-up training Equipment upgrades & process flow improvements  Periodically obtain feedback from wholesaler and retailers  Incorporate feedback into next iteration of food processing and packaging design Food and Beverage Manufacturing: Tetra Pak’s “Life Cycle Partnership” One Tetra Pak key account manager for each customer Tetra Pak key activities E.g. Dairy Manufacturer

75 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Project Risk

76 AJS CIRT, Santa Fe.ppt © Oliver Wyman  “Delusions of Success” – Harvard Business Review, July 2003

77 AJS CIRT, Santa Fe.ppt © Oliver Wyman   New products (food)78%  New products (Rx)96%  M&A60%+  IT projects76%  VC/new business projects80% Project risk: Failure rates

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79 AJS CIRT, Santa Fe.ppt © Oliver Wyman   Overinvest  Business design

80 AJS CIRT, Santa Fe.ppt © Oliver Wyman  5%                                         “20 moves" to raise the odds”  90%

81 AJS CIRT, Santa Fe.ppt © Oliver Wyman  The Checklist Manifesto, by Atul Gawande Chapter 3

82 AJS CIRT, Santa Fe.ppt © Oliver Wyman  “Hybrid” business designs HondaToyota Customer selection  Moderate income  High income Unique value proposition  Energy efficiency  Drive, style, electronics Profit model  Lower-margin cars  High-margin cars Strategic control  Patents  Brand evolution  Patents

83 AJS CIRT, Santa Fe.ppt © Oliver Wyman  “Hybrid” business design comparison Source: BusinessWeek. *Compared to four-cylinder Camry. Days to sell Estimated annual sales Premium over regular model Toyota Prius Lexus RX 400h Toyota Highlander ,00022,00020,000 $1,150*$11,110$6,590 Honda Civic 36 28,000 $2,790 Honda Accord 56 20,000 $3, $5K $3K

84 AJS CIRT, Santa Fe.ppt © Oliver Wyman  The Toyota Way (Chapter 6) – Jeffrey Liker

85 AJS CIRT, Santa Fe.ppt © Oliver Wyman  What are three different business designs for each new growth initiative?

86 AJS CIRT, Santa Fe.ppt © Oliver Wyman  000s Number of OnStar subscribers ’99 Revenue: $43MM Source: Literature Searches, Harvard Business School Case N

87 AJS CIRT, Santa Fe.ppt © Oliver Wyman  OnStar Business Design Customer selection  Luxury  All GM drivers  GM and others Value proposition  “Accessory”  Safety/security  Remote diagnostics  Safety security  Remote diagnostic  Information, entertainment  Growing suite of applications Profit model  Sell more cars  Subscription  Maximum volume  Service tiers Strategic control  ?  Cost position/ installed base  De facto standard  Brand Go-to-market  Dealer install  Factory install  Factory install, GM, and other OEMs IIIIII

88 AJS CIRT, Santa Fe.ppt © Oliver Wyman  000s Number of OnStar subscribers ’02 Revenue: $1BB Source: Literature Searches, Harvard Business School Case N ’99 Revenue: $43MM

89 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Tale of Two Economies

90 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Stagnation Risk

91 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Mystery of Demand

92 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Building from the customer up The messy ambiguity of the market place Demand:  How does it happen?  Why does it not?  How does it change?  Why does it always surprise us? Scope Strategic Control Profit Model Unique Value Proposition Customer Selection The messy ambiguity of the market place

93 AJS CIRT, Santa Fe.ppt © Oliver Wyman  The Underneath-the-Surface World of Dali and Bosch

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104 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Proceed with Caution

105 AJS CIRT, Santa Fe.ppt © Oliver Wyman  What separates the winners iPod vs. Zune Kindle vs. Nook Zipcar vs. Hertz Nespresso vs. Lavazza from the rest?

106 AJS CIRT, Santa Fe.ppt © Oliver Wyman  What separates the winnersfrom the rest? Netflix vs. Blockbuster Salesforce vs. Oracle Eurostar vs. Air FrancePrius vs. Honda Civic

107 AJS CIRT, Santa Fe.ppt © Oliver Wyman  76M How does this happen? Zune vs. iPodNook vs. KindleBlockbuster vs. NetflixHertz vs. Zipcar Air France vs. EurostarLavazza vs. NespressoHonda Civic vs. PriusOracle vs. Salesforce

108 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Masters of the Demand Equation  Nespresso  Eurostar  Netflix  Tetra Pak  Zipcar  Growing Power  Wegman’s  FactSet  Dassault Systems  Kindle by Amazon  Bang & Olufsen  OnStar by GM  Apple  Capital One  CareMore (Health)  Salesforce.com  Bloomberg  Pret A Manger  Facebook  Capital IQ  Virgin Atlantic

109 AJS CIRT, Santa Fe.ppt © Oliver Wyman  The Demand Equation How magnetic? Response rate drivers Behind the screen: Are all pieces in place? How fast are we getting better? How many different types ?

110 AJS CIRT, Santa Fe.ppt © Oliver Wyman  The Demand Equation: Rating all the components Inert No Don’t knowMaximize Irresistible Yes FlatSteep OneMany

111 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Magnetic? Quality Magnetic What’s my score? BA BA

112 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Emotional connection Many of these winners, despite a very functional positioning, achieve a degree of emotional connection with their customers “I love this store” 2010 CPM survey responses Percentage of responses Strongly disagree Disagree Neutral Agree Strongly agree

113 AJS CIRT, Santa Fe.ppt © Oliver Wyman  M = F X E

114 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Subconscious Conscious FunctionalEmotional X

115 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Not first mover, but … First to create and capture the emotional space.

116 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Biggest Mistake #1 Stopping before we get to magnetic

117 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Behind the screen: Examples  Infrastructure  Ecosystem  Deals  Organization Demand Leverage

118 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Demand Leverage  Windows Software Writers  Amazon Customer Recommendations  Netflix Customer Reviews  Netflix Coupon in DVD player boxes  iPhone App Developers  Facebook App Developers  Music Industry Supporting iTunes  User data in GMail  Articles about Zipcar  Articles about Starbucks (first 5 years)  Articles about Pret a Manger  Nespresso in First Class $5 billion? $80 million? $30 million? $75 million? $1.3 billion $100 million? $570 million $500 million? $30 million? $50 million? $75 million? $10 million?

119 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Demand Leverage: How do we engage others in our demand process?  Software developers  App developers  Customer review writers  User-provided preference data  Media Coverage

120 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Biggest Mistake #2 Assuming magnetic is enough

121 AJS CIRT, Santa Fe.ppt © Oliver Wyman   When was the last time I bought something I really loved?  When did I first want to?  When did I actually buy it?  What triggered me to do it? Purchase I LovedGap (weeks, months)Trigger

122 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Triggers  6:1Machine demo plus serve the coffee (Nespresso)  10%  22%Local processing center (Netflix)  10%Recommendation algorithm improvement (Netflix)  15  5  3% to 10%(Zipcar)  20%Parking and killer offer (Symphony)  25%Trial (Apple)  50%Word of mouth (Nespresso)

123 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Hassle map Fight with spouse – what movie to see – “you decide” Search and search Go to store Pick three Go home Fight again – pick one Forget to return WatchReturn five days later, pay late fee, get mad Get online; construct queue; get recommen- dations WatchReceive films in mail Put in mailbox to return Automatically receive next film in queue

124 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Post OfficeProcessing CenterCustomer  Convenient  No damage Brand  Bland, or  Deep imprint

125 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Non-Obvious Response Rate Drivers?

126 AJS CIRT, Santa Fe.ppt © Oliver Wyman   Word of mouth  99.9 percent  Recommendation engine  Processing centers (4  1)

127 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Netflix: Response rate drivers Processing center

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129 AJS CIRT, Santa Fe.ppt © Oliver Wyman  When you’ve won, you can: a) Coast b) Keep it dynamic

130 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Dynamic  “Get better fast”  Meaningful variation You take an idea, and develop it to its full potential

131 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Netflix responded immediately: they dropped price and raised their number of titles Titles Titles: Blockbuster Online versus Netflix Blockbuster Netflix

132 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Netflix Demand Equation Inert No Don’t know Irresistible Yes FlatSteep OneMany Maximize

133 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Eurostar’s Hassle Map Air  50 minutes  55€  40 minutes (check-in, security, walk a mile)  WWF act with the bags  Heathrow: 30 minutes at Customs  Heathrow  London: –40 minutes –55£ Eurostar  10 minutes  10€  10 minutes (check-in, customs, security)  Lots of room at end of car  Done in advance  St. Pancras to London –10 minutes –10£  Extra 160 minutes  Extra $150  Extra 20 minutes  Extra $30

134 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Eurostar’s Hassle Map AirEurostar

135 AJS CIRT, Santa Fe.ppt © Oliver Wyman  De-Averaging the Customer Premiere First £196 one-way Lounge, Meal, Champagne, 10-min Check-in, Ticket convertible to air Standard £99 one-way Fast & Cheap Business First £175 one-way Business lounge, Fast meal, 10-min check-in, taxi to/from station Economy Plus 110£ one-way Quiet cars, Frequent traveler points Note: Fares based on a single ticket for one-way service from London to Paris on December 10, 1997 Source: Eurostar, access 08/13/2010

136 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Source: Ridership based on multiple news reports; investment amounts are approximate. Note: (*) Brussels line only. Changes in average ridership were estimated by finding average ridership in the pre-improvement interval and comparing this with ridership in the post-improvement interval. Since customer de-averaging was introduced in 9/1996, the period has been adjusted accordingly. In addition, the years were excluded from estimates of the interval due to the fall off in travel stemming from 9/11 and the business cycle downturn. Major Improvements Changes in Average Ridership (in millions of passengers) Customers De-Averaged Low cost +0 Minutes +52% Belgium High Speed rail £1.1B cost +30 Minutes* +19% First part of ‘High Speed 1’ £1.7B cost +20 Minutes +21% Second part of ‘High Speed 1’ £1.7B cost +20 Minutes +17% Pre Post

137 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Richard Brown, Eurostar CEO, Under Brown’s leadership, Eurostar ridership grew 33 percent and market share increased 15 percentage points. "My instinct is to talk to customers – what they want, what more can we do. I'm not sure everyone does this.” Source: Derbyshire Life (12 March 2010), Business Travel World (October 2007)

138 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Millions of Passengers Source: CAA Eurostar has grown the market and increased market share Eurostar and airline passengers (London to Paris by year) 38%63%65%77% Eurostar Market Share: Airlines Eurostar

139 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Eurostar’s Demand Equation Inert No Don’t know Irresistible Yes FlatSteep OneMany Maximize

140 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Two Endings

141 AJS CIRT, Santa Fe.ppt © Oliver Wyman  “War is a series of catastrophes – resulting in victory.” – Georges Clemenceau “… for a little while.” – Adrian Slywotzky

142 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Can Giants Innovate?  Nespresso  Playstation  OnStar  Prius  Lexus  Kindle  IBM PC  xBox  iPod  Hulu  NTT DoCoMo i-mode  Dassault Systèmes  Swiffer  White Strips  Sam’s Club  Dayton Hudson/Target  ING Direct  Droid  HP Printer  Bloomberg Media  Aldi/Trader Joe’s  Tesco Financial Services

143 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Strategic risks and countermeasures Extreme riskCountermeasures Brand  Golden Triangle Technology shift  Double bet  Change the oddsProject risk Customer shift  Proprietary information Industry economic squeeze  Compete/collaborate ratio Stagnation risk  Little box/big box Unique competitor  Change the game

144 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Technology Shift

145 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Technology risk Market Capitalization ($B) Lucent Jan 98 Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 98 Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Xerox KodakPolaroid Jan 98 Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 98 Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04

146 AJS CIRT, Santa Fe.ppt © Oliver Wyman 

147 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Technology risk: Barnes and Noble $ billions Amazon B&N.com Source: Compustat; annual reports. B&N.com vs. Amazon (Net sales, media only) Barnes & Noble vs. Amazon (Market cap, June 2007)

148 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Double betting  IBM  Intel  Microsoft  Motorola  Nokia  Barnes & Noble  Blockbuster  Kodak DidDid Not

149 AJS CIRT, Santa Fe.ppt © Oliver Wyman  “When you come to a fork in the road, take it.” – Yogi Berra

150 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Brand Risk

151 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Ford Brand Value Source: Interbrand. $BB

152 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Sony Brand Value Source: Interbrand. $BB

153 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Samsung Brand Value Source: Interbrand. $BB

154 AJS CIRT, Santa Fe.ppt © Oliver Wyman 

155 AJS CIRT, Santa Fe.ppt © Oliver Wyman  The Golden Triangle Product Brand Business Design

156 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Customer Shift

157 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Coach No. of interviews  Batch to continuous  Proprietary customer information

158 AJS CIRT, Santa Fe.ppt © Oliver Wyman  Proprietary information  Capital One  Tsutaya  Coach  Harrah’s  JCI

159 AJS CIRT, Santa Fe.ppt © Oliver Wyman  “What do we know about customers that others don’t?”

160 AJS CIRT, Santa Fe.ppt © Oliver Wyman  “Risk is just an expensive substitute for information”

161 AJS CIRT, Santa Fe.ppt © Oliver Wyman 