A Capabilities Approach

November, 2014

From Strategy to Execution

Strategy&

The Unmet Need: Connecting Strategy to Impact

Source: PwC CEO survey; Strategy& survey of 3,000+ senior executives, Fit for Growth* survey of 500+ senior executives

* Fit for Growth is a registered service mark of PwC Strategy& Inc. in the United States

More than half of senior executives don’t

think they have a winning strategy

2 out of 3 admit they don’t have the

capabilities needed to create value

4 out of 5 executives admit their overall strategy isn’t well understood…within their own company!

9 out of 10 concede they are missing major opportunities in the market

1

Strategy&

Legend

The unmet need – the importance of getting strategy right

-35% -30% -25% -20% -15% -10%

Strategic – 81%

Operational – 7%

External – 3%

Compliance – 9%

2

Source: The Lesson of Lost Value (strategy+business) by Christopher Dann, Matthew Le Merle and Christopher Pencavel

Annualized Total Shareholder Returns compared to industry

Strategy&

The History of Strategy

Adaptation Act quickly and creatively in response to events (organizational warning)

Position Exploit the high ground: create and hold a distinctive position

(market-back strategy)

Concentration Focus on your current

core business (private equity)

Execution Align people and processes for operational excellence (the quality movement)

Deming Out of

the Crisis

Mintzberg The Rise and

Fall of Strategic Planning

Zook Profit from the Core

Hamel & Prahalad

Competing for the Future

Peters & Waterman In Search of Excellence

Hammer & Champy

Reengineering the Corporation

Charan & Bossidy Execution

Abernathy & Hayes “Managing Our way to

Economic Decline”

Porter Competitive

Strategy

Henderson Essays

Andrews The Concept of

Corporate Strategy

Kim & Mauborgne Blue Ocean

Strategy

Chandler Strategy & Structure

Source: The Right to Win, by Cesare Mainardi and Art Kleiner, published in strategy+business (issue 61)

Future

Present

Few Many

3

Strategy&

Adaptation Act quickly and creatively in response to events (organizational warning)

Position Exploit the high ground: create and hold a distinctive position

(market-back strategy)

Concentration Focus on your current

core business (private equity)

Execution Align people and processes for operational excellence (the quality movement)

Deming Out of

the Crisis

Mintzberg The Rise and

Fall of Strategic Planning

Zook Profit from the Core

Hamel & Prahalad

Competing for the Future

Peters & Waterman In Search of Excellence

Hammer & Champy

Reengineering the Corporation

Charan & Bossidy Execution

Abernathy & Hayes “Managing Our way to

Economic Decline”

Porter Competitive

Strategy

Henderson Essays

Andrews The Concept of

Corporate Strategy

Kim & Mauborgne Blue Ocean

Strategy

Chandler Strategy & Structure

Source: The Right to Win, by Cesare Mainardi and Art Kleiner, published in strategy+business (issue 61)

Future

Present

Few Many

Who do you want

to be?

4

The History of Strategy

Strategy&

Capabilities-Driven Strategy: What We Believe

…

5

Essential advantage lies within.

A few differentiating capabilities define identity and success

Strategy&

Companies need to pick their battles … and arm themselves with the capabilities to win them again and again

How are we going to create value for our customers in this market?

What do we need to do

well to deliver that value

proposition?

What are we going

to sell in this market

and to whom?

Winning companies align their strategic direction to the capabilities that make them

unique. They make hard choices about differentiation and stick to them.

Right to

Win

6

Strategy&

Coherence correlates with superior profitability

100 0

P&G

Nestle

Campbell’s

ConAgra

General Mills

Kraft

Unilever

PepsiCo

Clorox

20

8

32

28

24

20

16

12

Capabilities Coherence Score

80 60 40

Sara Lee

Heinz

Kimberly Clark

Wrigley’s

The Coca-Cola Company

Consumer Packaged Goods

4

EB

IT %

2003-2

007

Size of Bubble: Revenue

7

Source: http://www.strategyand.pwc.com/global/home/what-we-think/reports-white-papers/article-display/coherence-premium

Strategy&

Case Study: IKEA

Way to Play — IKEA provides functional, stylish, aspirational and

affordable home products in a unique retail experience that

engages and involves customers

Consumer

lifestyle

insight “Prix-fixe”

furniture

design

Customer-

integrated

operating

model

Hyper-

efficient

supply

chain

Environ-

mentalism

& CSR

“Day out”

shopping

experience

Any trademarks included are trademarks of their respective owners and are not affiliated with, nor endorsed by, PricewaterhouseCoopers LLP.

2928

2524

222220

18

1513

5

2000

’54 ’12 ’13 ’11 ’10 ’09 ’07 ’08 ’06 ’05 ’04 ’94 ’84 ’74 ’64

IKEA revenue (EUR bn)

8

Strategy&

Case Study: Pfizer Consumer Health Care

Pfizer sold PCH to J&J for $16.6Bn or 20.6 times EBITDA in 2006 Value Capture

Way to Play

Develop and market

advantaged

molecules and

formulations able to

meet substantive

therapeutic claims

Product and Service Fit

Reorganized to grow

“golden” global brands

at above-market rates

Rationalized the OTC

and CHC product

portfolio

Divested personal

care (Schick brand) to

Energizer

Sold confectionary

(Bubblicious, Halls) to

Cadbury

Pharma-like innovation & Rx-to-OTC switches Claims-

based innovation and NPD

Ability to scale global

brands & products

Claims-based marketing

Regulatory manage-

ment

Effective retail

execution

9

Capabilities System

Strategy&

It is incredibly hard to grow

10

Number of years in which company outpaced

its sector in terms of annual TSR (2004-2013)

8

5%

7

9%

2%

11%

0

15%

6%

3 1 5

16%

4

17%

% o

f co

mp

an

ies

3%

2

13%

9

2%

6

Growth Consistency

Source: Capital IQ, Strategy& Analysis

Highly

consistent

growers

Growth Choices

10

Strategy&

How would you prioritize growth choices?

Core

Grow Core

Extend

Capabilities

System

Expand

Geographic

Footprint

Acquire New

Capabilities

Growth Choices

11

Strategy&

Can you cut costs and grow stronger?

Strategy& “lights-on” cost and discretionary investment perspective

Not Required Essential Capabilities

Non-essential

capabilities

3–6 differentiating

capabilities that build

sustainable advantage

Eliminate or be

parsimonious

May spend more than

competitors

“Lights-On” Table Stakes

Activities required to

“keep the lights

on”/operate (e.g.,

legal requirements,

etc.)

Activities required to

compete in a given

sector

Aim for best-in-class

cost levels

Aim for best-in-class

cost levels

30-50%

10-20% 20-30%

20-30% Taking costs

out is a

strategic

opportunity

to make clear

focus

decisions

Starting Cost Base

Breakdown

Expenses Choices

12

Strategy&

What does this imply for portfolio strategy?

Improve

Performance

Flagships

Grow and Expand

Relatively Coherent

Integrate or Sell

Lone Star

Sell or Isolate

Under-leveraged

Grow or Milk

Detractors

Divest/Discontinue

Fin

an

cia

l

po

ten

tia

l

Above

Par

Below

Par

High Coherence with capabilities system

Low

Portfolio Choices

13

Strategy&

Are you able to realize the capabilities premium in M&A?

Sources: Capital IQ; Strategy& analysis

Returns from enhancement and leverage deals, (compared with limited-fit deals)

3.9%

0.4%

-9.1%

15%

20%

5%

0%

25%

10%

Retail IT Electric

utilities

Chemicals Health-

care

Industrials Consumer

staples

Media

Enhancement Leverage

Limited fit

Return to shareholders (Compared with market index)

Enhancement Leverage

12% points variance

M&A Choices

14

Strategy&

Case: Consumer Packaged Goods Industry Evolution

15

CADBURY SCHWEPPES

Dr PepperSnappleGroup

Cadbury

(incl. Adams)

Adams

ChefAmerica

Prometheus

Spillers pet food

Ralston

Purina

Pfizernutrition

Tivall

Gerber

Jenny Craig

Novartis medical nutrition

Alcon

(Including previously acquired

Summit, ESBA,and Wavelight)

Schoeller ice cream

Aqua Cool Pure Water

Powdered milk

Yogurt brands

Moevenpick ice cream

Dreyer'sGrand ice

cream

European water delivery Delta ice cream

Vitality Foodservice

Candy and chocolate mfg.

NESTLÉ

SUNNY

DELIGHT

BEVERAGES

JM SMUCKERS

MONDELEZ(FORMERLY KRAFT)

KRAFT FOODSGROUP

(FORMERLY KRAFT)

North American grocery

business

Global snacks company

consisting of Kraft’s entire

non-U.S. business and Kraft’s

U.S. snacks division

Pet food

RALCORP

D.E MASTER BLENDERS(FORMERLY SARA LEE)

This newly formed company

holds all the assets associated

with Sara Lee’s international

coffee and tea business

HILLSHIRE BRANDS*(FORMERLY SARA LEE)

Meat-centric food company taking over

from Sara Lee after the successful

spin-off of its international coffee and

tea business

Instant consumption: snacks

Instant consumption: beverages

Health-oriented food

Ready-made meals

Meal ingredients

Pet care

Personal care

Home care

Healthcare

Apparel

Pharmaceuticals

Chemicals

Tobacco

PostCereals

Coffeebusiness

US$1 billion

$10billion

$50billion

PENDING

DIVESTITURE

ACQUISITION

KEY

Frozen pizza(DiGiorno)

Mergers and Acquisitions

in the CPG Industry Each circle represents a business unit that moved to a new company between 1997 and

2014. The net eff ect, in most companies, was to coalesce around fewer sectors (see key for

colors), often applying the same capabilities. This chart captures only mergers,

acquisitions and divestitures, not the size of existing businesses.

SIZE OF CIRCLE

REPRESENTS

SIZE OF DEAL

BR

IST

OL

-MY

ER

S

SQ

UIB

B

KELLOGG

PROCTER & GAMBLE UNILEVER

Clearasil

Yardley

Spinbrush

Deodorant (Right Guard, Soft & Dri)

European tissue operations

American and Asianbranded apparel

European brandedapparel

Douwe Egberts Van Nelle

tobacco

Coach

European meats

North American and European bakeries

EuroDough

EarthgrainsPYA/Monarch

*Pending merger with Tyson Foods

Gillette

Clairol

Wella

Tambrands

Ssangyong Paper

Frederic Fekkai

Vita Invest

Nioxin Research Labs

Inverness Medical Innovations

Loreto y Pena Pobre

Risedronate division in Japan

Prescription drug business

Pringles

Iams,

Eukanuba,

Natura

Arbora &

Ausonia

Cressida

Best Foods

SpecialtyChemicals

Slim-Fast

Ben & Jerry’s

AlbertoCulver

Findus Italia

European frozen food(Iglo, Birds Eye)

Best Foods Baking

Sanex

Prestige Fragrance

European dry soupand sauces

Italian olive oil

DiverseyLever

Global shoe care

Direct sales ofpersonal care

Insecticides

Danonebiscuits

andsnacks

Cadbury

Nabisco

Chewinggum andcandy

Sugar confectionary

U.K. desserts

Log Cabin

Minute Rice

Hot cereal BIMO

North Americancoffee and teafood service

FolgersFruit20 water,

Veryfine juice

SunnyDelight,Punica

NO

VA

RT

IS

PFIZER

LATAM and Australianinfant nutrition

Global bodycare and

European detergent

Jif peanutbutter,

Crisco oil

Ambi Pur

Refrigerateddough

Coffeebusiness

Kraft's North American

grocery business

Strategy&

Top Leaders’ Effectiveness at Both Strategy Development and Execution (% of respondents with answer other than N/A, N=686)

Neu

tral o

r w

ors

e

Ve

ry e

ffe

ctive

Neutral or worse Very effective

Top leaders’ effectiveness in answering the fundamental questions about

strategy and identity that will lead your company to long-term success?

Top leaders’

effectiveness at

keeping the company

on track in executing

its strategy?

A call to action for future leaders

Eff

ective

Effective

Source: “What Drives a Company’s Success?” survey

8%

4%

1%

2%

23%

14%

1%

12%

35%

16