Our Region’s Challenges What We’ve Learned

1. Our Region’s ChallengesWhat We’ve Learned July 2009 Harry Strachan

2. Topics • Perspectives and Challenges? • Lessons for Business? • Lessons for Leadership? 1 - CFR Red.pot

3. Who “we” are … Mesoamerica … Our history Our region Bain & Co. CR MESOAMERICA • Mesoamerica’s roots (1993-1998) • Bain Costa Rica – Consulting • Mesoamerica Fund 1 (1996-1998) • Mesoamerica (1998 – present) • Strategy consulting, • Mergers & acquisitions • Private equity • Mesoamerica Foundation • Offices: San Jose (1998), Bogota (2008) • 35 Professionals: 13 Nationalities; variety of educational and work backgrounds “Core” countries Offices

4. Topics • Perspectives and Challenges? • Survey re Global Crisis • Key challenge & CAFTA • $64,000 Question • Lessons for Business? • Lessons for Leadership? 1 - CFR Red.pot

5. TheSurvey (12/08 – 2/09) 1 Screnarios & probabilities in U.S. • Typical “V” Recession • Prolonged “U” Recession • Severe “L” Recession or Depression 2 Impact of the crisis in Central América • Worse in Central America • Better in Central America 3 Evidence of the crisis in yourcompany • Yes • No 4 Actionstaken as a result of the crisis • Defensive • Offensive 5 Leadership in the crisis • Advicetoourgovernments • Advicetothe International Agencies & othercountries

6. Probable scenarios? Optimistic (>30%) In middle Pessimistic (>30%) All # responses (Percent) • TypicalRecession • Recoverybyend of 2009 • Dow Jones ↑ >11,000 • Creditavailable • Prolongedrecession • In recessionuntil 2010/11 • Dow Jones @ 8,000 has hit bottom↑above 9,000 byend of year • Créditavailablebutexpensive • SevereRecession • Profoundrecession > 3 years • Dow Jones not hit bottomGoesbellow 7,000, doesn’trecoverquickly • Crédithardtoget

7. Historiccorrelationis a fact … • Correlación: • Contemporánea: 0.62 • Un trimestrerezagado: 0.72

8. Impact of crisis in Central America? Optimistic (≥60%) In middle Pessimistic (≥60%) All # responses (Percent) • Better in C.A. than U.S. • Regionlesslinkedto U.S. China & India new motors of growth • Regionless vulnerable, more diversifiedeconomically • Government reserves high and local banks are healthy. • Worse in C.A. than U.S. • “Whenthe U.S. gets a cold, wegetpenumonia.” • Governmentsdon’thavemuchcountercyclicalcapacity.

9. Our major challenge – closing the gap Theeconomic Gap between Central America and developingcountries has increased in thepast 40 years … GDP/Capita (2000) G7 Central America Latin America Source: World Development Indicators 2002, The World Bank Group

10. In education and poverty, the gap is significant … * % of households whom income is less than double the cost of basic family needs Source: World Bank, ECLAC, PNUD. Information to December 2003 060324 Briefing for US Ambassader2

11. The key cause -- lost decades In spite of strong periods of growth, internal conflicts and lack of sustained strategies often destroy much progress … War, instability Note: 1979 is included in the 80s decade Source: World Development Indicators 2002, The World Bank Group

12. CAFTA increases the likelihood of sustainable growth … Percentage of countries with Economic Growth > 3% (89 Countries in Development, 1970-1989) Trade policy 11 / 15 (73%) 1 4 / 74 (5%) % of countries with GDP CAGR >3% 1 A country is “always open” if it has: a) Non-tariff barriers on less than 40% of trade, b) Average trade tariffs less than 40%, c) Difference between official and black market figures is less than 20% d) non-socialist economic system, and e) Open market in its main exports Source: Economic Reform and the Process of Global Integration, J.D. Sachs and A. Warner, Harvard University

13. CAFTA contributes to the elements of a strategy for sustained development • Social: •  training and opportunities for development •  investments in education and health • Economic: •  trade and investment •  employment and salary levels •  productivity and competitiveness •  growth and incomes in equitable manner •  consumer prices •  poverty Impact FTA CA-US • Institutional: •  transparency and improve/ strengthen rule of law •  corruption •  political stability

14. $64,000 Question in 2009 Will the current crisis lead to protectionism in the world and populism in the region that undercut CAFTA and the progress of the last two decades and send us into another “lost decade?” 1 - CFR Red.pot

15. Topics • Perspectives and Challenges? • Lessons for Business? • Magnitude of the Challenge 1993 • Strategies that worked 1993-2008 • Tools for the future? • Lessons for Leadership? 1 - CFR Red.pot

16. Thebusinesschallenge in 1993 Whatisthemagnitude of changethatglobalizationwillrequire? Calidad 2.20 2.00 1.79 Costo 0.46 0.52 0.50 Fuente: Bain & Company, muestra de compañías globalizadas

17. Potential Value StrategicFocus • ROIC > WACC • Strategic position (RMS) • Sustainablegrowth Current Value OperatingExcellence • Benchmarking • Bestpractices • Organizationaleffectiveness Key toCompetitiveness The formula thatworkedforcompaniesthatmettheglobalizationchallenge… 030827-JAS-XCD-INTEL PREEZ6

18. 4 Vehiclerepairs per day per mechanic 3.04 3 Vehicles Per Day 2 1.14 1.00 0.86 1 0.79 0.77 0.66 0 Taller 1 Taller 2 Taller 3 Taller 4 Taller 5 Taller 6 Benchmark USA Benchmarking and best practices’ was a very powerful tool for rapid improvement … Average 0.87 030827-JAS-XCD-INTEL PREEZ6 Fuente: Bain & Company

19. The focus of our consulting today … Consulting • Typical projects: • Review of business portfolio • Evaluation and redesign of strategies and business models • Business planning and performance monitoring Competitiveness A winning business strategy and a solid business model • Typical projects: • War planning • Turnarounds • Benchmarking • Typical projects: • Full potential analysis: core business and adjacencies • Growth strategies • Strategic due diligence and integration of acquisitions Productivity Corporate governance best practices Core business’ full potential Sustainable and profitable growth Organizational Effectiveness • Typical projects: • Organizational redesign • Role of the center • Family-company relations

20. Strategic Alliances • Acquisitions • Mergers NON COMPETITIVE POSITION • Exit Strategies Critical Paths In ordertoachieveleadership, implementbestdemonstratedpractices, and acquirecompetencies, local companiesmustoftenengage in strategicalliances, mergers, or acquisitions 030827-JAS-XCD-INTEL PREEZ6

21. Lesson 5: Negotiation Process It is critical to understand the objectives and interests of the parties in order to determine if there is a common ground to reach a mutually beneficial agreement Families • Dividends • Succession issues • Local/Nacional Loyalties • Others Mutlinationals • Enterprise value • Continuity and professionalism • Multicountry loyalties • Others Case A: ZONE OF MUTUAL BENEFIT Case B: NO MUTUAL BENEFIT 030827-JAS-XCD-INTEL PREEZ6

22. An Important Business Question Where will companies find the “gold” in the future? Superiority in the basics: cost and quality? Innovation? M&A and regional expansions? Financial engineering? What sectors? 1 - CFR Red.pot

23. Topics • Perspectives and Challenges? • Lessons for Business? • Lessons for Leadership? • INCAE 1981 Seminar “Live cases in leadership in chaos” • Participants List of lessons • Personal implications 1 - CFR Red.pot

24. The “Live” Cases • Some examples: • Automobile Inventory as Managua is taken by the Sandinistas • “Under the gun” pay raises in a maquilador • What to do about the New Office Tower? – Complete, Distressed sale and Miami? • Rural hardware stores in the civil war 1 - CFR Red.pot

25. Effectiveleadership in crisis: • Realism and criticalanalysis • Proactiveaction • Careforyourpeople • Energy and optimism • Audacity Source: Participants INCAE Seminar 1981, Leadership In Chaos based on live cases

26. Becominganeffective leader in crisis Pesimistic Optimistic Analytic Intuitive