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November 22, 2005

Presentation of Strategic Planning Process to The Management of EGAT Public Company Limited. November 22, 2005. Background. Banpu has implemented the new strategic planning process, which is part of the Value Based Management (VBM) concept since 1999 Management wants to achieve:

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November 22, 2005

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  1. Presentation of Strategic Planning Process to The Management of EGAT Public Company Limited November 22, 2005

  2. Background • Banpu has implemented the new strategic planning process, which is part of the Value Based Management (VBM) concept since 1999 • Management wants to achieve: • Plan’s effectiveness, which is about the end results of the plan and direction of plan • Plan’s efficiency, which is about the implementation of such plan as well as the monitoring and reporting process • Effective risk management scheme to deal with uncertainties.

  3. The objective of the presentation is to provide an overview of the strategic planning processes currently used at Banpu The intention of this presentation is: • To build the same understanding of VBM and the strategic planning concept • To illustrate the current practices and processes • To share the views and encourage discussion at the end of the session

  4. VBM Framework Overall Planning Process Process and Schedule Overall Input and output Strategic Positioning Assessment (SPA) Corporate Strategic Planning Risk Management Q&A Agenda

  5. Why do we plan? • Why do we do planning? • How do we do it? • How does planning create competitive advantage and value? • What do we do after we plan? • How do we measure our plan’s success?

  6. The VBM management cycle. A value-based culture is developed and sustained by continuously applying a value focus across all stages of the management cycle Planning to achieve highest value Strategic Planning Allocating capital and human resources on basis of highest value strategy Interpreting and sending market signals Value Focus Resource Allocation Investor Communications Incentive Compensation Performance Measurement and Evaluation Reward and incentive around delivering value creating plans Setting and monitoring performance to deliver plan

  7. What is VBM? And why we use it? • VBM aims to align management’s interest with that of the shareholders • VBM is not about valuation; valuation is part of VBM • It’s about identifying strategic and operating issues and coming up with strategies to overcome these to sustain/create the company’s competitive advantage • It’s also about setting goals and measuring the performance in order to change behaviour by rewarding employees with the right incentives to build shareholder value • VBM entails balancing long- and short-term perspectives

  8. “Cash Flow Based” Community Staff Share Price vs. Quarterly Operating Cashflow(1996 - 2000) R2 = 0.6 Shareholder Value Regulators Environment SharePrice(Bt.) Customers Suppliers Operating Cash Flow (Bt. Million) To create value, management must choose strategies that effectively balance the needs of all stakeholders in the long run

  9. Steps 1 and 2 of VBM: Strategic Planning and Resource Allocation Strategic Planning and Resource Allocation • Credible strategic plans with sound cash flow projections • Determine value of each Business Unit • Use value creation to choose between alternative strategies • Identify key value drivers for eachoperation • Set performance targets for each business in terms of value drivers Planning to achieve highest value Strategic Planning Allocating capital and human resources on basis of highest value strategy Interpreting and sending market signals Value Focus Resource Allocation Investor Communications Incentive Compensation Performance Measurement and Evaluation Reward and incentive around delivering value and creating plans Setting and monitoring performance to deliver plan Expected Output • Value drivers • Strategic options • Strategy valuations • Maximum value strategy • Optimal capital structure • Allocations of resourcesamong competing demands

  10. Social, political, regulatory and community factors Competitive conditions and industry attractiveness Company’s market opportunities and external threats Craft the strategy Determine relevance of internal and external factors Company’s Strategic Situation Resource strengths, capabilities, and weaknesses Management’s aspiration, shared value, and culture Source: CSP Shareholders’ value is impacted by a number of factors both internal and external, a carefully crafted strategy is needed to ensure success in the future  External Factors An integrated set of options designed to create a sustainable advantage over competitors  Internal Factors

  11. To do this we must be able to answer the following questions... A value-based management strategic planning process ensures that both the corporate objectives and each of the business units is capable of answering the following critical questions • Where is value today and why? • What is our business model? Should we change our model? • Where is value planned to be created? • What is driving planned value creation? • Where are the sensitive and key assumptions? • How aggressive are the assumptions? • Where are value risks/opportunities? • Where should management focus to create and sustain value? • Where should capital be allocated and which projects should have priority? • How will we know if we are on track in delivering the plan and in achieving operating excellence?

  12. Model Logic Advantage Sustained by Key Assumptions Managerial Application Example Economies of Scale Increased scale enables spreading of fixed costs over larger volume, leads to lower costs Investments in large production and distribution channels Large fixed costs that can be shared over greater volume of same product Invest heavily in large scale production, avoid diversification Siam Cement Economies of Scope Increased number of related products will enables spreading of fixed costs over greater volume, leads to lower costs Investments in large production and distribution channels Cost can be shared across the related products Standardise inputs into production, make a range of products that share costs CP Group Economies of Focus Lower costs can be achieved by serving only one segment of a market Firms serving broader market unwilling to relinquish investment in broader customer base Efficiencies can be gained by focusing on one segment, needs of different segments vary greatly Focus on niche where firm can achieve lower costs than firm serving broader market BMW Experience Curve Cost per unit declines with cumulative experience (output X time) Inability of competitors to match experience Competitors will not attempt the same volume enhancing strategies; economies of experience are automatic Reduce price of advertise to increase volume, seek lessons from experience, transfer experience through firm PTT-EP Unocal Value Chain/ Differentiation Create value by reorganising activities to increase the value added to the customer Entry barriers within the industry (reputations, brand names, customer loyalty prevent imitation) Customer are the most important stakeholder, firm can adapt to needs Understand customer needs and value chain, configure organisation appropriately Tesco Makro Competitor Analysis Can predict competitor behaviour from past actions, alter own strategy accordingly Competitor blindspots Rational firm’s strategy is influenced by past strategy and resources Examine competitors to predict behaviour and react accordingly Thai Beverages (Beer Chang) Which business model(s) do we employ?

  13. In planning our strategies, we need to understand key value drivers (KVDs) of the business Financial parameters Operating parameters Net selling price Revenue Sales volume Recovery % Conveyor operating costs Contractorcharge rate Cost NPV Cash flow Contractor cost Waste stripped (stripping ratio) Production operating costs Supporting costs Discount rate Overhead costs Working capital Capital expenditure Fixed capital

  14. By finding the right Key Value Drivers (KVDs), we can prioritise our efforts to focus on the right areas

  15. Value of each strategic alternative is compared to arrive at the most value-creating solution

  16. 1,174 1,200 105 (139) Value Created $248 959 1,000 925 $ Millions (PV) 800 ILLUSTRATIVE 600 400 200 0 1999 Value Required return (11%) 1999 Actual Cash Flow 2000 Required Value 2000 Value This involves an annual estimate of value creation based on a Business Unit’s strategic plan Value Creation for Shareholders - = Dividends + Stock Price Required Return Value Creation in a business unit - Invested capital = PV [Free Cash Flow (FCF)] - Required Return @ WACC = Return generated by free cash flow

  17. Capital allocation Capital Allocation Framework High TOP PRIORITYPROJECTS 2nd PRIORITYPROJECTS ValueCreationPotential 2ND PRIROTYPROJECTS IGNORE(for now) Low Low High Corporate Priority

  18. Steps 3 and 4: Performance measures, goals and compensation must be linked to key value drivers Performance management Planning to achieve highest value Strategic Planning Allocating capital and human resources on basis of highest value strategy • Annual value creation/value destruction • Set key value drivers based on: - impact on value - controllability - measurability • Select key performance indicators to be used as a basis for incentive targets Interpreting and sending market signals Value Focus Resource Allocation Investor Communications Incentive Compensation Performance Measurement and Evaluation Reward and incentive around delivering value and creating plans Setting and monitoring performance to deliver plan Expected Output • Business Unit & Groupvalue creation summary • Performance targets • Performance monitoring

  19. We need to monitor KVDs of the business and initiatives throughout the year in order to ensure value generation

  20. Met Performance Targets on Controllable Drivers Failed to Meet Performance Targets on Controllable Drivers 30 30 25 25 20 Millions of Dollars 20 15 15 10 10 5 5 0 0 Price Rise Price Fall Cost Overrun Actual 98 Value Change in Value Cost Reduction Actual 98 Value Change in Value Predicted 98 Value Volume Increase Predicted 98 Value Actual Volume Below Forecast Value destruction occurred because the price dropped even though volume forecasts were exceeded and costs reduced Value was created but volume forecasts were not met Actual performance should be tracked regularly at the right level of details because it is possible for the same overall performance to be achieved from significantly different changes in key drivers

  21. Incomplete and inaccurate input creates gaps and blur procedures create incomplete output QUALITY OF INPUTS GARBAGE IN GARBAGE OUT Process QUALITY OF COORDINATION Input Process Output

  22. Role of Strategic Planning Function Broad Roles Implication on Strategic Planning Function • Strategic Leadership • Develop corporate strategy • Develop sector strategies • Provides guidance to BU strategy formulation • Develop alliances / JVs • Capital • Allocate capital across sectors and BUs • Minimise cost of capital • Perform treasury planning • Control • Exercise strategy control on behalf of the shareholders • Establish group-wide performance measurement system (together with HR) • Monitor sector and BU performance • Resolve conflicts arising from planning and monitoring • Analyse/manage strategic and financial risks • Capabilities • Encourage external perspective and use of benchmarks • Share best practices across group entities • Help in organization capability development pertinent to the needs and priority • Identity • Formulate a shared vision and set of values and create the most favourable and strongest corporate identity possible • Governance • Enforce corporate governance requirements

  23. Core beliefs • Total shareholder return relative to peers is the best measure for assessing corporate performance • Shareholder value is determined by expected future cash flows discounted at the cost of capital • Understanding market economics and competitive position is essential to identifying sources of value creation • Shareholder value is created when business units create better than expected, or Superior Shareholder Value Added • Evaluating and selecting alternative growth strategies -- both internal and external -- applying a fact-based and forward looking cash-flow approach, and key management processes • Aligning value maximizing strategies with key management strengths is a critical success factor • No single performance measure is best at all levels of an organization or in every situation. However, performance measures must be transparent and consistent

  24. VBM Framework Overall Planning Process Process and Schedule Overall Input and output Strategic Positioning Assessment (SPA) Corporate Strategic Planning Risk Management Q&A Agenda

  25. The 3 key stages of VBM can be viewed by activities – SPA, Planning and Implementation • Market assessment • needs • segmentation • size • growth • structure • trends • Competitive assessment • review • position • drivers • Financial Performance • historical • forecast • Key challenges and opportunities SPA PLANNING IMPLEMENT Strategy Documentation & Implementation Planning Strategic PositioningAssessment Strategic Options Formulation Strategic Options Evaluation & Selection Implementation & Monitoring • Corporate/portfolio strategy • Resource allocation • Final financial consolidation • Document strategy • Key actions • Key targets and milestones • Responsibility areas • Performance commitments • Data capture • Measurement of KPIs • Monthly performance reports • Periodic strategy reviews • Market and segment initiatives • Product/service offering initiatives • Price initiatives • Cost initiatives • Asset initiatives • Financial and value impact of options • Potential competitor responses • Risk assessment • Strategy selection • Fit with capabilities • Sensitivity analysis • Contingency options • Future strategic options • Review portfolio impacts

  26. Key Supporting Dept.’s Finance • Address capital requirements of total business portfolio • Interact with capital markets • Acquire/divest assets • Manage cash flow Strategic Planning • Portfolio focus • develop corporate strategy • Verification of each BU strategic plan • Drive VBM/strategic planning process • New business opportunities • Set stretch targets Legal • Provide strategic, forward looking perspective on legal issues Business Development • Business development issues relating to the larger corporate entity - works closely with Strategic Planning (or is part of it) IR / Corp Commun-ications • External communications with investors and analysts • Internal communications • Assist with roadshows and capital raising HR • Capability requirement • Implement incentive compensation A number of functions are involved in the planning process; each with a common goal of supporting the BUs All supporting activities should be in alignment and should be supportive of the BU plans

  27. VBM Framework Overall Planning Process Process and Schedule Overall Input and output Strategic Positioning Assessment (SPA) Corporate Strategic Planning Q&A Agenda

  28. Inputs required are from several sources – both external and internal...but most important of all we need opinions from our people • Previous year’s performance information – revenue, cost, asset changes • External data on industry trends and forecasts • Opinion inputs from our teams – marketing and operations • Brainstorm of ideas to identify and solve issues • Conclude solution and recommend • Assign who is to do what

  29. Contents of a strategic plan should include the followings 1. HISTORICAL REVIEW Last year Plan Value Management Actions Cash Deliveries and Capital Investment Key Strategic and Operational Issues, Initiatives and Milestones 2. MARKET OVERVIEW Segmentation Analyses Supply and Demand Conditions and Projections Competitive and Customer Analyses Business Unit Cost and Differential Position Investment Opportunity Identification 3. STRATEGIC OPTIONS Strategic Issues and Challenges Strategic Option Identifications "Scope-down" Framework Strategic Options Evaluations 4. STRATEGIC PLAN Plan Value Free Cash Flow and Capital Expenditure Forecast Profiles Key Assumptions & Risks Performance Commitment & Resource Request 5. IMPLEMENTATION & ACTION PLAN

  30. VBM Framework Overall Planning Process Strategic Positioning Assessment (SPA) Corporate Strategic Planning Risk Management Q&A Agenda

  31. Insights and Alternatives Strategic Analysis Strategic Analysis Financial Analysis Financial Analysis Business Plan Business Plan Financial Forecasts Financial Forecasts Proposed Proposed Industry Structure Industry Structure Operating Value Operating Value Business Strategy Business Strategy Profit & Loss Profit & Loss Key Initiatives Key Initiatives Balance Sheet Balance Sheet Business Strategy Business Strategy Key Value Drivers Key Value Drivers Resource Request Resource Request Financial and Financial and Issues and Issues and Cash Flow Cash Flow Competitive Position Competitive Position Strategic Performance Strategic Performance Alternatives Alternatives Cost of Capital Cost of Capital Commitments Commitments SPA generates strategic insights and alternatives SPA PLANNING

  32. Management devises business unit strategies based on an externally validated understanding of industry attractiveness and competitive position by asking the followings: • What are the volume and price implications of key industry trends? • How will competitors respond to your major decisions? • How do your costs compare with competitors? • What are customers key purchase attributes? How do your products and services compare with the competition? • Is your business more or less capital intensive than competitors? Why? • Does business unit management describe alternative strategies to address major opportunities and threats? • Does management collect and validate external data to confirm key assumptions? • Does management compare the value implications of the current strategy and alternatives on a periodic basis? • Are financial forecasts credible? • Does management post-audit the change in the business unit value based upon the preferred strategy?

  33. A view on the attractiveness of each structural factor should, in turn, be built up from a view about the key components of each factor Structural forces Factors to analyse Examples of measurement variables Intensity of competition Product standardisation Number / concentration of competitors Variability of costs Growth Maturity of market Price and discounting behaviour Market share variability Customer power Customer concentration Switching costs Price elasticity Pressure groups Number of customers / competitors Top 10 customers as % of total volume Threat of entry Economies of scale Brand identity Capital requirements Distribution access Supply access Customer switching costs Government regulation New entrants in last three years New entrants following regulatory change Threat of substitutes Supply of substitutes Substitute distribution Substitute market economics Revenue growth versus substitutes Supplier power Supplier concentration Supplier switching costs Regulation Importance of volume Number of suppliers / competitors Top three suppliers as % of total supply Regulatory influence Environmental Regulations - land reclamation - air pollution Investment allowances/subsidies Hydrocarbon output

  34. Strategic Position MarketGrowth High Intensity of Direct Competition Competitive Erosion Value Creation Customer Pressure Industry Erosion Threat of Substitutes Value Destruction MarketReturns Threat of Entry Low Disadvantaged Advantaged Competitive Position Supplier Pressure Regulatory Pressure A strategic position assessment can be derived by forming a view about the drivers of market attractiveness and relative competitive position Market Attractivenessor Potential for Value Creation Differentiation Position Relative Cost / Asset Position

  35. There are two sources of competitive advantage Differentiation Advantage • Perceived superiority of offering • Key indicator: ability to premium price and maintain market share • Examples • product quality • consistency of supply Cost Advantage • Lower operating cost per unit • Lower capital cost per unit • Examples: • scale / scope advantages • low cost process technology • capacity utilisation

  36. A view on the attractiveness of each competitive position factor can, in turn, be built up from a view about the key components ILLUSTRATIVE Differentiated Position Cost / Asset Position • Product quality • durability • precision • Product type • specifications • use (eg thermal, metallurgical) • Marketing and distribution • delivery time • Customer service • advice • credit terms • Operating costs • Development costs • patents • land rights • Marketing and distribution costs • advertising costs • method (eg rail, conveyor) • distance from market • Overhead costs • size of fixed asset investment • size of administrative offices and staff • Assets • amount of overburden • size of reserve • capital costs

  37. Implicit in your plan are assumptions about Market Attractiveness and Relative Cost Position Current Future Attractive Market Attractiveness Unattractive Disadvantaged Advantaged Disadvantaged Advantaged Relative Competitive Position Relative Competitive Position

  38. Specialise • Seek niches • Consider acquisitions • Evaluate potential for leadership via segmentation • Identify weakness • Build strengths • Grow • Seek dominance • Maximise investment • Specialise • Seek niches • Consider exit • Identify growth segments • Specialise • Invest selectively • Identify growth segments • Invest strongly • Maintain position • Trust leaders statesmanship • Time exit and divest • Prune lines • Minimise investment • Position to divest • Maintain overall position • Seek cash flow • Invest at maintenance levels A company’s market attractiveness and competitive position implies certain strategic options High Moderate Market Attractiveness Low Weak Moderate Strong Competitive Position

  39. However, it is common to find a poor linkage between the "strategy" component of a plan and the "financial" forecasts Financial Position Assessment Strategic Position Assessment 250 Attractive 1 200 1 2 150 4 Market Attractiveness 100 Value 3 50 2 3 0 5 4 (50) Unattractive 5 Disadvantaged Advantaged (100) Relative Competitive Position

  40. VBM Framework Overall Planning Process Strategic Positioning Assessment (SPA) Corporate Strategic Planning Risk Management Q&A Agenda

  41. In summary, Corporate Strategic Planning serves a number of objectives for the company • The objectives of CSP are to: • Correct current weaknesses and map out the future • Set vision for the company and set targets/elaborate on the measures • Consolidate financials • Evaluate the strengths and weaknesses of the portfolio • Future opportunities – evaluate country risks • Outline implementation steps • Monitor current operations for improvements

  42. VBM Framework Overall Planning Process Strategic Positioning Assessment (SPA) Corporate Strategic Planning Risk Management Q&A Agenda

  43. Corporate Risk Management Process Identify Objectives Assess Monitor Business Process / Projects Act Enterprise-wide Risk Management : Corporate & Business Process Levels • Corporate levels risk – risks that have a strategic impact • Project/Process level risk – risks that have an operational impact

  44. Effective risk Management The ability to minimize the downside and maximize the upside Linkage to Corporate Plan Success! = = = Risk Management Implementation in Opportunity or Asset Development • The risk management framework is designed to help the organization achieve its business objectives through the alignment of vision, mission and strategies with day-to-day activities HOW?

  45. Here Is How Risk Management Could Be Integrated? Vision Mission Strategic Business Objectives Operations/ Business processes Employees/ Partners Stakeholders Financial • Risk Process • Identify • Assess • Act/Mitigate • Monitor/Report Business Processes/Departments/Business Units Day-to-day operations and decision-making Processes Projects

  46. Here Is How Risk Management Could Be Integrated? • Vision and mission • EGAT will evaluate its mission and vision and the risk process will be an important component of this evaluation. • Risks will be identified and assessed for the company to consider in determining the nature and direction of its business strategy. • Strategic Objectives • Corporate objectives, business objectives, and performance targets will be set. • The risks that might prevent the achievement of each objective should be identified, assessed, and prioritised.

  47. Here Is How Risk Management Could Be Integrated? • Business units and departments • Business plans should be developed to include the risk mitigation actions. • Performance measurement of the business plan should integrate risk and the risk responses into consideration of the operational objective setting.

  48. Here Is How Risk Management Could Be Integrated? • Day-to-day operations • Risk management framework should be used at this stage to identify and assess operational risks that may prevent EGAT’s staff to achieve the operational objectives. • Risk responses and the risks of delivering the support to EGAT’s vision and mission should be taken into the prioritisation of the staff activities. • Staff have the responsibility to identify, assess, and respond to risks within their direct areas of responsibility and to identify risks that require an escalation to individual with specific risk management responsibilities, (e.g. risk manager, risk coordinators, the executive team).

  49. VBM Framework Overall Planning Process Strategic Positioning Assessment (SPA) Corporate Strategic Planning Risk Management Q&A Agenda

  50. Thank you for your attention

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