Value Growth How to Profit from Pattern Thinking May 26, 2000--FEI-Chicago

1. Value Growth How to Profit from Pattern ThinkingMay 26, 2000--FEI-Chicago

2. Risk • Disaster • Currency • Operational • Product liability • Strategic

3. Value Collapse: The Fortune 1000 % of Top 100 Law-suits Natural Disaster Competitive Wrong Products CustomerLosses R&D Delays PoorManage-ment Foreign Economic Issues High Input Prices Interest Rates Cost Overrun Demand Shortfall Pricing Pressure Regulation Supplier Problems Merger Problem Accounting Problems Supply Chain Issues Strategic61% Operational 33% Financial 6% Hazard 0%

5. B Mercer PerspectiveStaying ahead of change requires ongoing opportunity identification and re-invention. ValueLandscape • Value ChainSteps • CustomerSegments A Time

7. B Business Design 3 Business Design 1 Business Design 2 Mercer PerspectiveStaying ahead of change requires ongoing opportunity identification and re-invention. Business Design 4 ValueLandscape • Value ChainSteps • CustomerSegments A Time

8. Business Strategy Evolution ProductCentric CustomerCentric ProfitCentric

9. Achieving Sustained Value GrowthIn a world of dynamic strategies, senior executives must answer two deceptively simple questions . . . over and over. Where will we be allowed to makea profit in this industry? What Business Design(s) willenable us to capture that profit andcreate shareholder value?

10. Polarization CISCO vs. Bay Networks ShareholderValue($BB) CISCO Bay Networks Source: Mercer Value Growth Database

11. Polarization CISCO vs. Bay Networks Shareholder Value CISCO $525BB ShareholderValue($BB) Bay Networks $6 BB Source: Mercer Value Growth Database

12. Polarization Yahoo vs. Others ShareholderValue($BB) Yahoo! Excite Lycos Infoseek Source: Mercer Value Growth Database

13. Polarization Yahoo vs. Others Yahoo! ShareholderValue($BB) Excite Lycos Infoseek Source: Mercer Value Growth Database

14. Polarization Microsoft vs. Apple vs. Lotus ShareholderValue ($BB) Microsoft Apple Lotus Source: Mercer Value Growth Database

15. Polarization Microsoft vs. Apple vs. Lotus Shareholder Value Microsoft $498 BB ShareholderValue ($BB) $13 BB Apple Lotus $3 BB Source: Mercer Value Growth Database

16. Polarization Wal-Mart vs. Kmart ShareholderValue ($BB) Wal-Mart Kmart Source: Mercer Value Growth Database Note: Fiscal Year Values; Does not include LTD

17. Polarization Wal-Mart vs. Kmart Shareholder Value Wal-Mart $206 BB ShareholderValue ($BB) Kmart $6 BB Source: Mercer Value Growth Database Note: Fiscal Year Values; Does not include LTD

18. Polarization Intel vs. AMD ShareholderValue ($BB) Intel AMD Source: Mercer Value Growth Database

19. Polarization Intel vs. AMD Shareholder Value Intel $278 BB ShareholderValue ($BB) AMD $3 BB Source: Mercer Value Growth Database

20. Polarization GE vs. United Technologies vs. Westinghouse ShareholderValue ($BB) GE Westinghouse United Technologies Source: Mercer Value Growth Database

21. Polarization GE vs. United Technologies vs. Westinghouse Shareholder Value GE $370 BB ShareholderValue ($BB) United Technologies $30 BB Westinghouse $30 BB Source: Mercer Value Growth Database

22. The Response: Business Design and Re-invention

23. Business Design Environment • Traditional • Emerging • CustomerPriorities • Stated • Silent • Future Business DesignWinning Business Designs create value by being perfectly calibrated to changing customer priorities and working hard to stay that way. Value Capture/ Profit Model Customer Selection and Value Proposition What high-value customers am I targeting with what unique offer? What profit model will I harness to capture value from this customer? Organizational Systems How will I “build in”sustainability to myBusiness Design? What scope of activities and assets are required? Scope Strategic Control

24. The Customer Template Inputs, Raw Material Assets Offering Channels The Traditional Value Chain

25. The Customer Template Inputs, Raw Material Channels Offering Assets Reversing the Value Chain

26. Radar Screen: Financial Services Banks Brokers

27. 1988 1992 • DIFM investor • Financial planners • Mutual funds • Investors • Fees • Referrals • Mutual funds and fees • Plannerrelationships • Technology • Owning the switchboard • Back-office services • “Discount” mutual funds Services for Financial Planners Switchboard Business Design Schwab’s Business Design Reinvention 1980s • DIY investor Customer Selection • Commissions Value Capture • Branches • Brand Strategic Control • Discount brokerage Scope Value-Added Discount Broker

28. “Switchboard” Mutual Fund Companies Investors

29. “Switchboard” Mutual Fund Companies Investors The Profit Zone Schwab

30. Radar Screen: Financial Services Banks Brokers

31. 1988 1992 1997 • DIFM investor • Financial planners • Mutual funds • Investors • Mutual funds • Investors • Fees • Referrals • Mutual funds and fees • Mutual funds and fees • Plannerrelationships • Technology • Owning the switchboard • Owning the “choiceboard” • Relationships • Back-office services • “Discount” mutual funds • World-class digital infrastructure Services for Financial Planners Switchboard Business Design First Digital Financial Services Firm Schwab’s Business Design Reinvention 1980s • DIY investor Customer Selection • Commissions Value Capture • Branches • Brand Strategic Control • Discount brokerage Scope Value-Added Discount Broker

32. Charles Schwab Shareholder Value Growth Over Time Charles Schwab Merrill Lynch ($BB) E*Trade

34. Mega Value Chain Customer Channel Product Knowledge Organizational Back to Profit Emerging De Facto Standard Re-inter-mediation Profit Multiplier Conven-tional to Digital TechShift Reinte-gration Com- pression Block-buster Know-ledge to Product Re-definition Conver-gence Squeeze Micro-segment Solution Corner-stoning Product to Customer Collapse of the Middle Weak Link Power Shift Multipli-cation Pyramid Network Ops to Know-ledge Traditional Productto Brand Skill Shift No Profit Deinte-gration ProfitShift Concen-tration The Evolving Patterns Architecture

35. Strategic Anticipation Spectrum “I know forsure” “Strategic Anticipation®” is about understanding enough to see tomorrow’s opportunities before the competition. “I see it coming” “I think it might happen” “I have a sneaking suspicion” “I’m totally oblivious”

36. De-Integration: A $1.3 Trillion Value Chain Pattern Customer Customer * As of Aug. 1999 Source: Mercer Value Growth Database

37. De-Integration of the Computing Value ChainComputing Value Migration: 1986-1998 $136BB $172BB $193BB $232BB $370BB $782BB $1550BB $169BB $159BB $202BB $296BB $588BB $1005BB Service Networks Cisco Software Microsoft Percent of Total Shareholder Value Chips Intel Hardware IBM SOURCE: Mercer Value Growth Database

38. The future has arrived. It’s just not evenly distributed.

39. Mega Value Chain Customer Channel Product Knowledge Organizational Back to Profit Emerging De Facto Standard Re-inter-mediation Profit Multiplier Conven-tional to Digital TechShift Reinte-gration Com- pression Block-buster Know-ledge to Product Re-definition Conver-gence Squeeze Micro-segment Solution Corner-stoning Product to Customer Collapse of the Middle Weak Link Power Shift Multipli-cation Pyramid Network Ops to Know-ledge Traditional Productto Brand Skill Shift No Profit Deinte-gration ProfitShift Concen-tration The Evolving Patterns Architecture

40. Conventional to Digital Business Design Conventional to Digital Business Design Mega Value Chain Customer Channel Product Knowledge Organizational Back to Profit Emerging Down-stream De Facto Standard Re-inter-mediation Profit Multiplier Conven-tional to Digital TechShift Reinte-gration Com- pression Block-buster Know-ledge to Product Re-definition Conver-gence Squeeze Micro-segment Solution Corner-stoning Product to Customer Collapse of the Middle Weak Link Power Shift Multipli-cation Pyramid Network Ops to Know-ledge Traditional Productto Brand Skill Shift No Profit Deinte-gration ProfitShift Concen-tration

41. Half-Time@ the Internet Superbowl Mercer’s Perspectives on Incumbents versus Start-up Dot.coms

42. Half-time at the Internet Superbowl… 0:00 3 200 WWIFX Incumbents New.coms S&P 0

43. What is the Internet All About? MediaView Dot-coms Fortune 1000

44. The New.coms’ locker room…What’s working? a.k.a. the West Coast Offense. Re-intermediation Value-added Intermediary Supplier Customer Brand Rush Cornerstoning

45. While Internet companies have shown the ability to drive substantial revenue growth, profits have become even more elusive Internet Companies’ Financial Results Excludes Cisco Systems and AOL/Netscape $ Billions Losses as a% of sales: (36%) (28%) (52%) Source: Mercer Internet Co. Value Flows Database.

46. Suspect profit modelsAdvertising revenue is suspect as a widespread source of value for the Internet sector as advertising expenditures rise more rapidly. Sources: Mercer analysis; Competitive Media Research; Internet Advertising Bureau; Advertising Age; Forrester Research.

47. New.coms coach’s concerns... • Crowding • Scaling Fulfillment capabilities • Escalating cost of customer acquisition • When will we have to demonstrate profit potential?

48. The incumbents locker room “The picture’s pretty bleak, gentlemen… the world’s climates are changing, the mammals are taking over, and we all have a brain about the size of a walnut.”

49. The B2B Internet opportunity is large and growing rapidly Internet Revenues (US) B2C $B B2B Infrastructure Source: IDC/LINK, Forrester Research 1999, Mercer Internet Database.

50. What is the Internet all about: Mercer perspective MediaView A Different Perspective B2C NO PROFIT ZONE Dot-coms $100B • Exiting a No-Profit Zone • Strategic move • Good business design Business toBusiness$1,000B Fortune 1000 e-Commerce