Quest for values Vermont June 2010

1. QuestforvaluesVermontJune 2010

2. Agenda of thepresentation www.questforvalues.com StrategicValue Management

3. StrategicValue Management (SVM) links strategicmanagementwith stock valuecreation Growth Innovation Ability to innovate and grow Ability to manage investments in unique inimitable resources, intellectual capital (minimize physical capital) Ability to influence prices and volumes of sales and consequently have high margins Ability to satisfy customer needs Resources Market power Ability to outperform the competition Negative EVA Positive EVA

4. Thepressuretomaximize stock valueactson managers Growth • To have a positive EVA firms must be more profitable than the average of the industry. Growing without a positive EVA leads firms to destroy economic value • Firmsmustgrowabovetheaverage of theindustry • Firmsmustmaximizethe use of their capital Innovation Ability to innovate and grow Ability to manage investments in unique inimitable resources, intellectual capital (minimize physical capital) Ability to influence prices and volumes of sales and consequently have high margins Ability to satisfy customer needs Resources Market power Ability to outperform the competition Negative EVA Positive EVA

5. CEO Product A Country C SBUs organized by product SBUs organized by geography SBUs organized by customer Product B Country D SBU product A SBU country A SBU customer A SBU product B SBU country B SBU customer B Customer E Customer F Customer G Customer H SBU product C SBU country C SBU customer C Human Resources Strategic Planning Growth Growth Stock valuemaximizationpervasiveness in business Growth 1990-pres: Organizations as brains Strategy as Pattern The strategy is created real-time throughout the whole (horizontal) organization. (Edvinsson, Garvin, Lenz and Lyles, Mintzberg, Nonaka & Takeuchi, Quinn, Senge) Perfect Competition Oligopoly Monopoly Monopolistic Competition Prior to 1950: Organizations as machines 1950-1980: Organizations as organisms 1980-pres: Organizations as networks Strategy as Plan 1. Cost efficiency, lean manufacturing, economies of scale 2. Reduction of competition: consolidation 3. Promotion strategies: imperfect information 4. Distribution strategies: push strategy, low level channel, logistics 1. Product strategies: differentiation and positioning, innovation. Strong branding and packaging 2. Pricing strategies: linear and non-linear, bundling and tying (promos, combos, long term agreem.) 3. Promotion strategies: pull, advertising and personal selling, Customer relationship 4. Distribution strategies: push / channels, logistics, supply chain management 1. Experience, technology, innovation, capital 2. Switching costs: CRM 3. Increase of scale economies predatory price discrimination 4. Block channels 5. Predatory Differentiation, advertising 6. Government policy. Collusion on specific variables of the marketing mix (avoid competing in prices, differentiation, innovation, etc.) The plan is developed by senior management, at the top, concentrating all information from the (vertical) organization. (Andrews, Ansoff, Drucker, Wheelen and Hunger) Negative EVA Positive EVA Negative EVA Positive EVA Organizations Marketing Growth Process Matrix Divisional Functional ACTIONS RESOURCES Negative EVA Positive EVA EVA = 10% EVA = -2% EVA = 6% EVA

6. Variable 1: firm’sresourceshelptopredict stock valuecreation Growth Industries which resources are based on intellectual capital Branded Consumer, Knowledge (biotech, software, consulting, financial services). Firms with Market Power E-business, Internet, Cellular Industries which resources are based on physical capital Manufactures, Autos, Electronics, Infrastructure, Utilities, Telecommunic., Transportation, Airlines Construction, Banking Commodities, Agribusiness, Natural Resources and Metals, Chemicals Negative EVA Positive EVA

7. Abuses of resources • Abuses of human resources produce: employee screening, overwork, sweatshops, employee lack of privacy, discrimination, workplace safety, downsizing, layoffs and abuses in executive pay. • Abuse of the environment produces: air, water and land pollution, depletion of resources, environmental accidents, bio engineering abuses, global warming, acid rain, ozone layer depletion and hazardous waste.

8. Variable 2: profits (EVA) dependonthecompetitiveenvironment and strategies Growth Perfect Competition Oligopoly Monopoly Monopolistic Competition 1. Cost efficiency, lean manufacturing, economies of scale 2. Reduction of competition: consolidation 3. Promotion strategies: imperfect information 4. Distribution strategies: push strategy, low level channel, logistics 1. Product strategies: differentiation and positioning, innovation. Strong branding and packaging 2. Pricing strategies: linear and non-linear, bundling and tying (promos, combos, long term agreem.) 3. Promotion strategies: pull, advertising and personal selling, Customer relationship 4. Distribution strategies: push / channels, logistics, supply chain management 1. Experience, technology, innovation, capital 2. Switching costs: CRM 3. Increase of scale economies predatory price discrimination 4. Block channels 5. Predatory Differentiation, advertising 6. Government policy. Collusion on specific variables of the marketing mix (avoid competing in prices, differentiation, innovation, etc.) ACTIONS RESOURCES EVA = 10% EVA = -2% EVA = 6% EVA

9. Abuses of marketpower • The need to control consumers leads to: abuses in advertising, manipulation of consumers autonomy, advertising of alcohol and tobacco, violence in movies and music, high interest loan market and financial greed, product liability, product safety and risks, consumer health, genetically modified products, protection of infants, deception and bluffing in sales, false information about a product or service, false price claims, bait and switch practices and unfulfilled promises. • The need to control the competition leads to : unfair competition, abuse of monopoly power, dumping, contributions to political parties, espionage and bribery.

10. Variable 3: sales growthdependsoninnovation Growth Innovation strategies based on RESOURCES Innovation through McKinsey’s capability platform: 1. Business specific core competences. 2. Growth-enabling competences (financing, risk management, deal structuring; regulatory management; capital productivity enhancement) 3. Privileged assets (brands, network, intellectual property, infrastructure, information, licenses). 4. Special relationships (access conveying, capability complementing) Innovation strategies based on ACTIONS 1. Innovation through acquisitions, alliances or internal development (new customer segments, new products, new geographies, new businesses, new value composition of the value chain, and increase in customer share). 2. Predatory Marketing. 3. Price Discrimination Negative EVA Positive EVA

11. Crisis of the EU (2010), East Asia and Latin America (1990’s) have been generated by speculation in currencies Exchange rate International interest rates Local Interest rates GDP Monetary base

12. Speculationon real estate, commodities and sovereigndebt: global financialmeltdown (2000s)

13. Whyspeculationbecamesuch a bigproblem?

14. Effects of 2008’s crisis (Financial Times) • Losers • Main Street, many years of austerity ahead • Unemployed (millions, young people) • Home owners (current and homeless) • Tax payers (current and future) • Middle class, mid-size companies • GDP • Employees • Traditional banks • The West • Winners • Wall Street • Global funds • BRICs, Australia, Asia, Latin America

15. Theshareholders, consumers and investors are leadingfirms’ behaviors Positive: • higher human development (longer and healthier life, knowledge, better quality of life, equality), • lower corruption (bribes, illegal payments, fiscal evasion, informal economy), • and better ecology (less contamination). Negative: • abuses of marketpower • abuses of natural and humanresources

16. Drug trafficking supply Drug trafficking demand Governmentshavelimitedpower. Public’svalues can make a difference Price of drugs sold Price of drugs sold 1. Supply falls as some drug cartels disappear 1. Demand falls as people consume less drugs Supply of drugs Supply of drugs 2. Price increases as a result of lower supply 2. Price decreases as a result of lower demand Demand for drugs Demand for drugs Volume of drugs sold Volume of drugs sold

17. Towards a new political, economic and social orderbasedon VALUES Values Individual and community values in modern psychology and world religions. Values Values Subject Values Subject Subject Subject COMMUNITY

18. Valuesbasedpoliticaleconomy • Realism (Machiavelli, Hobbes). Statesmustmaximizepower, strugglewithotherstodefendtheirinterest. Ethics, rights, institutions are irrelevant. WW I and II, Great Depressionweakenedit. • Liberalism (Locke, Kant). Citizenshave universal humanrights and liberal values (individualism, tolerance, freedom, constitutionalism) thatrequireinstitutionstoprotectthem (NATO, UN, IMF, WB, WTO). Economicintegration, transnationals and INGO reinforcepeace and stability. Theyseemunabletogenerateeconomicstability. • Social Constructivism. = OT / OB: community, cooperation, commongoals, norms, structures, cultures. Gametheory and rationalchoice.

19. Valuesbasedmarkets • End of speculation • End of blindmarketstoallocateresources • End of abuses onmarketpower and resources

20. Management: from stock valuemaximizationtoValuesBased Management • Planning. OrientationtothecommunityboostsIntellectual Capital: knowledge and relationships • Organizing. The individual, the group (community), the processes (communication, power, leadership, change) • Leading. Leadershipbasedonvalues (concernforpeople and tasks) • Controlling. TheBaldrige: selfmonitoringbasedonvalues and leadership

21. Thankyou