OLIVER WYMAN

September 8, 2007 The Upside How to Turn Big Threats into Growth Breakthroughs Prepared for: MMC Riyadh Seminar C O N F I D E N T I A L | www.oliverwyman.com Increasing risk and volatility © Oliver Wyman  www.oliverwyman.com Risk Hazard © Oliver Wyman  www.oliverwyman.com Financial Operating Strategic Human Capital What questions should you ask about strategic risk? ƒ What are the big risks that can damage my business? – Risk is just an expensive substitute for information ƒ Can they be turned into competitive advantages? – Your greatest growth opportunities are your greatest risks - reversed © Oliver Wyman  www.oliverwyman.com Widespread impact of strategic risk ƒ Strategic risk is rising, and the market is unforgiving ƒ While extreme volatility of earnings, expectations, and stock price has been inherent in tech companies, these characteristics are now infecting even the bluest of blue chips – very powerful companies operating in relatively stable industries ƒ Worse, those characteristics are infecting even the very best and smartest companies, iconic “great managers” running “great business models” (Wal-Mart, Dell, etc.) ƒ In this higher-risk environment, companies need to improve their skill at strategic anticipation and increase the resilience of their business designs Some leading companies have successfully challenged conventional wisdom, growing their profitability and value alongside relatively low betas ƒ Specific strategic risk events have impacted a wide variety of companies and industries; while leaders have responded in less than a year, others have yet to respond © Oliver Wyman  www.oliverwyman.com S&P: High-to-low quality ratio A-ranked stocks C-ranked stocks 35% 35% 31% 30% 30% 30% 25% 23% 20% 15% 15% 14% Percent of total Percent of total 25% 20% 20% 15% 10% 10% 5% 5% 0% 0% 1985 1990 © Oliver Wyman  www.oliverwyman.com 1995 2004 18% 12% 1985 1990 1995 2004 Procter & Gamble took five years to recover from 2000 market value drop $160 $140 $120 $BB $100 $80 $60 $40 $20 $ 1997 1998 1999 2000 2001 2002 2003 2004 2005 2007 Note: Market capitalization drop calculated from 99Q4 to 00Q3 © Oliver Wyman  www.oliverwyman.com Other blue chips have taken even longer to recover lost ground Deutsche Bank $80 $80 $60 $60 $BB $BB McDonalds $40 $40 $20 $20 $ 1996 1998 2000 2002 2004 $ 1990 1992 1994 1996 1998 2000 2002 2004 2006 2006 Merck $100 $250 $80 $200 $60 $150 $BB $BB Siemens $40 $20 $ 1995 $100 $50 1997 1999 2001 2003 2005 2007 $ 1990 1992 1994 1996 1998 2000 2002 2004 2006 Note: Market capitalization drop calculated from 99Q4 to 00Q3 © Oliver Wyman  www.oliverwyman.com Strategic risk management: Three modes I II III Anticipate/ ready before it happens React fast LAG months 80 months ƒ Most companies are neither in Column I (they don’t practice Strategic Risk Management), nor in Column II (they’re not organized to move fast) ƒ The vast majority are in Column III (many with dangerously long response times) © Oliver Wyman  www.oliverwyman.com Response lags Event Player Response time GM/Toyota Hybrid GM 84 months and counting Wal-mart/Target Wal-Mart 72 months and counting Blockbuster/Netflix BB 58 months Barnes & Noble/ Amazon B&N 36 months Motorola/Nokia 00 Motorola 36 months WSJ.com, YFinance WSJ ~20 months © Oliver Wyman  www.oliverwyman.com The Upside explores practical tactics to counter and find opportunity in risk Strategic risks, countermeasures, and growth Extreme risk Countermeasures Growth upside Technology shift ƒ Double betting ƒ Double bet to surprise the other guy Brand collapse ƒ Continuous measurement ƒ Reallocating brand investment ƒ Build the strongest brand in your business Unique competitor ƒ Early warning system ƒ Shift in business design ƒ Avoid the gorilla; be the gorilla in a different space Industry economic squeeze ƒ Change compete/collaborate ratio ƒ Collaborate more in order to differentiate more Customer shift ƒ Proprietary information ƒ Fast, cheap, continual experimentation ƒ Three-year lead Project risk ƒ ƒ ƒ ƒ ƒ Risk control system Market stagnation risk ƒ Early warning system ƒ Demand innovation © Oliver Wyman  www.oliverwyman.com Realistic determination of the true odds Smart sequencing Stepping stone method Develop excess options ƒ Growth system: Upward spiral 13 Strategic risk management incorporates new ways of anticipating and managing risk Traditional risk tools (Hazard, financial) Strategic risk tools ƒ Insurance ƒ Knowing the Odds ƒ Re-insurance ƒ Early Warning Systems ƒ Prevention programs ƒ Countermeasures ƒ Credit scores ƒ Collateral ƒ Capital allocations ƒ Hedging/derivatives/counterparties © Oliver Wyman  www.oliverwyman.com 14 Our approach © Oliver Wyman  www.oliverwyman.com 15 Our approach to ERM: Oliver Wyman’s value proposition ƒ Industry-leading thinking and research on how companies can reverse strategic risk ƒ We have a solid framework AND we understand your business – Not only we conduct management surveys and interviews to catalog the risks your organization sees, but we bring in our industry experts to assess global trends, anticipate and estimate risks you will likely be facing ƒ Enables greater Board/senior management visibility and understanding of strategic risk and financial implications, as well as links between ERM and strategy ƒ Cost-effectiveness of fixing today vs at the time of crisis (cents vs dollars), and identification of valuable quick hits ƒ Process engages and mobilizes management on risk, identifies comprehensive set of risks for focus, forces management to assess size and probabilities, and work against the feeling that “we can’t anything about it” or “that’s just the business we’re in” ƒ Process brings together cross-functional groups with linked responsibilities to address common risks and organizational roadblocks ƒ Move beyond a “checklist” mentality of risk management to explore strategic alternatives ƒ Shift to a comparable risk-return decision-making process, within an integrated and common framework ƒ Adaptable to client needs: Depending on degree of sophistication of current risk infrastructure, can emphasize integrated risk identification and mitigation, risk sizing and trade-off modeling, and/or capability development © Oliver Wyman  www.oliverwyman.com 16 We have a clear approach to risk assessment and capability development ERM infrastructure development 1.1 1.2 ERM framework and risk classification definition 1.3 ERM governance model Risk reporting Implementation plan Enterprise risk mapping and mitigation planning 2.1 Risk identification © Oliver Wyman  www.oliverwyman.com 2.2 Risk quantification 2.3 Risk prioritization & high-level mitigation planning 17 High-level description of work steps 1.1 ERM framework definition ƒ Review current stage of enterprise risk management ƒ Develop ERM vision statement, particularly around objectives, anticipated results and ownership 2.1 Risk identification ƒ Identify the main risks – Financial, hazard, operational – Seven major strategic categories ƒ Conduct major functions’ survey and selected interviews with senior managers ƒ Leverage Oliver Wyman industry expertise © Oliver Wyman  www.oliverwyman.com 1.2 ERM governance model ƒ Research on ERM governance models ƒ Design ERM related organization, management system and processes ƒ Recommend ERM related KPIs ƒ Scorecards for evaluating corporate performance 2.2 Risk quantification ƒ Quantify the magnitude and likelihood of major risks ƒ Develop the detailed risk profile for each major risk 1.3 Risk reporting ƒ Define the risk reporting contents, structure and responsibilities ƒ Develop the ERM guide book ƒ Develop the risk database prototype 2.3 Risk prioritization & highlevel mitigation planning ƒ Prioritize major risks based on probability and severity and develop overall risk map ƒ Identify and assess “upside” alternatives, business design changes ƒ Develop the high-level risk mitigation action plan to eliminate, reduce or counter key risks Implementation plan ƒ Develop implementation plan including timeline, milestones, key decision points, resource requirements and implementation ownership ƒ Adjust capital decisions based on risk assessments ƒ Ongoing risk monitoring and management 18 Strategic risk framework What can I do? Action plan to: Risk How big? How likely? Prevent Mitigate Maximize upside Action plan: Percent completion 0% 20% 40% 60% 80% 100% 10 © Oliver Wyman  www.oliverwyman.com 19 “Exposure” map Probability < 20% 20-40% 40-60% Certain events 60-80% 80-100% 100% Severity ($MM) >400 300-400 200-300 100-200