BUSINESS SIMPLIFICATIONA Path to Improved Profitability

June 2015

2Wilson Perumal & Company, Inc.

Complexity is the byproduct of an increasingly complicated business environment…

New Channels & Formats

Expanding Geographies

New Acquisitions

Expanded Portfolios

New Customer Expectations

More Regulation

IncreasingCompetition

More Suppliers

How did it get this way?

ComplexityMore ProductsNew Processes

Bigger OrganizationsLess Responsiveness

3Wilson Perumal & Company, Inc.Source: Business Simplification 2015: The Unmet Strategic Imperative, Knowledge@Wharton 2015. n=692

…And companies are beginning to recognize the need to simplify in order to prosper and grow

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34

2020

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Top Strategic Imperative

Somewhat Important

Moderate Strategic

Importance

Tactical Need

Not Important

What is your need for business simplification?

Percent of respondents

The value of simplification is both financial and strategic. It is a means to lower costs and improve the ability to grow

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What is business simplification?

“Simplification is a significant opportunity for us (P&G), particularly given the breadth of our business and brand portfolios…Basic product simplification (e.g., color) alone has the potential to generate up to $50 million in annual savings”

“The company (Coca-Cola) is taking several steps to transform the business, to accelerate growth and also to regain its momentum. These include, streamlining and simplifying the company’s operations”

“The company (Mondelez) also has improved productivity by transforming procurement and simplifying its portfolio…I am happy to report we are now operating at world-class performance levels”

“The bank (JPMorgan) said it will cut $2.8 billion in expenses …about $1.5 billion of those cost reductions will come from business simplification…’an attempt to refocus our priorities.’”

Business simplification can mean various things to, but any case it is about aligning focus and resources to maximize returns and growth…

“We (Unilever) operate in many markets, with many product categories and many brands. In that type of environment it's easy to end up trying to do too many things, rather than doing fewer things better. It's easy to become over-stretched, from both a process and resources point of view, and end up wasting opportunities.”

“The GE that emerges from the company’s simplification process will focus returns for more than 90% of its revenues in high return industrial businesses, including aircraft, healthcare and energy”

“We (Amcor) have been on a simplification journey having grown through acquisitions. To remain competitive, we needed to standardize and streamline. It is not an easy journey, but we’ve seen significant benefits.”

“We (Symantec) are going through a company-wide transformation. We have languished for quite some time because we weren’t structured (correctly) to implement a new strategy”

Source: ?????

5Wilson Perumal & Company, Inc.

Complexity diminishes the value of scale

“Individual productivity”

Volume

Cost

Pre-Industrial Age

• Energy limited by muscle power (man or beast)

• Little scale efficiencies• Efficiency driven by strength

and/or speed of individual working unit (narrow range)

“Economies of Scale”

Volume

Industrial Age

• Revolution in energy and machinery (steam, electricity, oil) create significant scale economy

• Efficiency driven by volume—”larger is better” (nearly unlimited range)

“Complexity Costs”

Complexity

Post-Industrial Age

• Significant growth in variety drives geometric growth in “complexity costs”

• Efficiency and affordability driven by balance between volume and complexity (complexity is the opposite of scale)

Complexity is why many larger enterprises are finding it hard to compete against smaller companies and even upstarts

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Moreover, complexity often starts a vicious cycle that focuses companies inward, away from customers

Complexity increases

Poor execution

Loss of control

Poor business results

More people and processes

Common drivers:‒ Too many products/services‒ Overreach on markets/geographies‒ Unfinished M&A integration‒ Patchworks of technology‒ Multiple ways of doing things

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The path to simplification is straight forward…Making the effort to clearly identify the sources and impact of complexity is too often an overlooked or hastily performed first step

Understand the sources and cost of complexity

Eliminate the bad complexity

Minimize the cost to deliver good complexity

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…the harder part is getting started and making the right choices along the way

Companies cannot outgrow complexity; nor do traditional cost containment, process improvement, or technology investments solve the problem

• Are we in the right markets using the right channels?

Business simplification typically starts by revisiting or refreshing the company’s strategy as those decisions will effectively lock-in a minimum level of complexity

• Are we offering the right products and services at the right prices?

• Do we have an operating model (structure) that supports our goals?

Mkt Mkt Mkt

Wilson Perumal & Company, Inc.

Operating in the wrong markets and channels adds a substantial amount of bad complexity

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If companies cannot charge customers a premium to purchase through more operationally complex channels, they must shift volume away from them

Store price: $50

Store EBITDA %: 30%

% of revenue from store channel: 45%

Online price: $50

Online EBITDA %: 25%

% of revenue from online channel: 45%

Catalog price: $50

Catalog EBITDA %: 15%

% of revenue from online channel: 10%

Product A profitability by channel

Highly desirable channel Unattractive channel

10Wilson Perumal & Company, Inc.

Too many products or services makes profitability harder to achieve and sustain

• Often the most profitable 20% to 30% of products generate more than 300% of the profits in a company, meaning…

• …the remaining 70% to 80% lose 200% of the profits.

Products that create profit

Products that “lose” profit

0% 25% 50% 75% 100%

100%

300%

% Total Products

0%

% TotalProfits

The “Whale Curve”

Right products?Right price?

Sources: Sievanen, Suomala, and Paranko, Activity-Based Costing and Product Profitability (Tampere, Finland: Institute for Industrial Management, Tampere University of Technology. Broniarczyk et al.’s category management research (1998, Journal of Marketing Research, Vol. 35, pp. 166-176)

Our experience as well as research finds that sales and customer satisfaction very often increase following a reduction in SKUs from portfolio optimization

Wilson Perumal & Company, Inc.

Companies can not out-execute a wrong or misaligned operating model

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Key Questions to Address:

The operating model defines the “who”, “what”, and “where” questions for how a company will execute its strategy. It is assessed on both effectiveness and efficiency.

What core capabilities and performance targets are needed to deliver differentiated value over strategic horizon?

What is the right level of governance (global/regional/local) to balance flexibility and standardization

What is the right mix of partners and suppliers? Does organization structure (including offshoring &

outsourcing) enable effective and efficient value delivery Do processes meet or exceed process design principles, with

end customer requirements met Are technology enablers robust enough to support scalability? Which areas of the current operating model can or cannot

support future state capabilities and targets?

Assets & Capabilities

Governance

Vendors & Partners

Process Design

Technology Enablers

Org. Structure

Wilson Perumal & Company, Inc.

What business simplification can do…

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Markets & Channels Operating Model

Industrial Equipment‒ Simplified and optimized pricing based

on new customer segmentation‒ Rationalized the product portfolio based

on complexity-adjusted margin analysis

Portfolio

Satellite Communication Provider‒ Restructured innovation pipeline and

processes to improve R&D lead time‒ Redesigned organization structure to

eliminate role & responsibility overlaps

“Fantastic piece of work. You’ve really shed a lot of light on our business. [Our company] will benefit enormously from your contribution”

‒ CEO

$17M+ opportunity defined+15% EBIDTA improvement realized+10% operating profit opportunity

Paints and Coatings‒ Identified significant channel overlap

between retail and wholesale outlets‒ Optimized channel strategy to improve

availability & reduce distribution costs

“WP&C has helped us go faster, have access to better capabilities and ask tougher questions”

‒ President, North America

“This was a professional job by the Wilson Perumal team. I am fully on board with their conclusions.”

‒ President, Europe

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Begin the Change

Understand theOpportunity

BuildAlignment

We help companies get started in multiple ways

1. Workshop 2. Diagnostic 3. Optimization/Redesign

Interactive half or full-day workshop for executive

leadership to build common understanding of complexity

drivers and create case for action

Focused diagnostic to specifically identify sources of complexity,

size of the prize, change barriers, and path forward. Clarifies the

levers for simplification

Full assessment and definition of future state with deep dives into

key areas of the business, requirements for change, and

complete investment case

“Concentrate your energies, your thoughts and your capital” – Andrew Carnegie

North America EuropeOne Galleria Tower

13455 Noel Road, Suite 1100Dallas, TX 75240

+1 972-716-3930

Longcroft House2/8 Victoria AvenueLondon, EC2M 4NS

+44 (0)203 206 1496

Contact Us:

contact@wilsonperumal.com