NEKIAStrategy Discussion

Confidential

Tel: (802) 296.8200 Fax: (802) 296.8300

205 Billings Farm Rd. Suite 2D White River Junction, VT 05001•

• •

November 18, 2005

2Confidential

Some Departure Questions…

• What is strategy?

• How would you describe your core business?

• What are the critical trends at work in the markets you serve?

• Are you the market leader in your core business, or is one of your competitors? Should you care?

• How do you think about growth in your business?

• What characteristics define the perfect investment?

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Agenda

Important Themes in Strategy Development

The Strategic Value of Market Leadership

A Growth Planning Framework

Questions & Open Discussion

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Defining Strategy

Strategy is the allocation of scarce resources

Strategy is a proprietary set of actions that better serve customers than the competition to build lasting market advantage

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10 Ideas Chief Executives Use all the Time…

1. Businesses must be grown or sold

2. Surplus growth is a central objective

3. Customers always act in their perceived self-interests

4. Real prices fall against a constant unit of customer value

5. Market leaders hold the most potential for superior returns

6. A growing market begets competition

7. All strategic analysis includes the variable of competition

8. Investment in advantaged positions yields superior returns

9. Operational excellence is not the same as strategy

10. Many strategies “implode” from lack of internal consistency or poor execution

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Agenda

Important Themes in Strategy Development

The Strategic Value of Market Leadership

A Growth Planning Framework

Questions & Open Discussion

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A Question…

What does the Educational

Knowledge Market look like?

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Understanding Market Structure

- Important Segments

- Market Size

- Growth Rates

- Competitor Positions

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Market Definition

Same customers Same cost structure

Different customers Different cost structure

One Business

Separate Businesses

Compete in both segments to take

advantage of synergies

Do not compete in both segments

Depends on the degree of

competitive advantage

conferred by sharing

Shared customers and/or

Shared costs

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The Importance of Business Definition

• Companies that define their business incorrectly make poor strategic decisions…

Costs Competitors

Incur unnecessary costs

Forgo opportunities to capture synergies

Do not transfer experience

Underinvest in important R&D initiatives

Overlook relevant competitive threats

Miscalculate “market share”

Set inappropriate performance targets

Overlook relevant capacity changes

Misjudge true cost position

Customers

Neglect profitable customer segments

Over-invest in unprofitable customers

Forgo opportunities to capture synergies

Misjudge relevant market trends

Overlook relevant geographies

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Market Segmentation

Customer

ProductTechnology

ChannelGeography

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Another One

8% 16% 8%Total: $215MM

Other

Coalition of Essential Schools

Direct Instruction

Core Knowledge

Ventures

Galef/DWoKModern Red SchoolHouse

Accelerated Schools

Co-nect

America's Choice

Success for All

Other

Middle Start

ELOB

Modern Red SchoolHouse

Accelerated Schools

Galef/DWoK

Ventures

Turning Points

Co-nect

Success for All

America's Choice

Other

SchoolDevelopmentProgram

ActionLearningSystems

ATLAS

ELOB

CoalitionofEssentialSchools

TalentDevelopmentHigh School

Co-nect

Ventures

High SchoolsThat Work

America'sChoice

Elementary Middle Grades HighSchool

$123MM $70MM $21MM

0

20

40

60

80

100%

Market Growth Rate, Two-Year CAGR:

School Reform Market ’02-03

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The Demand Curve

Talent Development High School

Action Learning Systems

America'sChoice

Eff

ecti

ve S

chools

Co-nect

Gale

f/D

WoK

Mod

ern R

ed S

choo

lHou

se

Nati

onal

Inst

itute

for

Dir

ect

Inst

ruct

ion

Urb

an L

earn

ing C

ente

rs

Successfor All

Turn

ing P

oints

ATLA

S

Talent Development Middle School

Coalit

ion o

fEss

enti

al S

chools

Mid

dle

Sta

rt

Acc

eler

ated

Sch

ools

Ven

ture

s

ELO

B

Integrated ThematicInstruction

Core

Know

ledge

Hig

h S

chools

That

Work

Making Middle Grades Work

Lights

pan

AV

ID RenaissanceLearning

0

50,000

100,000

$150,000

Unit

Pri

ce

Major Competitors Across CSR Award Universe

25% 50% 75%0% 100%

School Reform Market, 2003

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What They Tell Us…

- Aggregate Market Size and Growth Characteristics

- Segment Shares and Growth Rates

- Competitor Scope and Share

- Identities of Market Leaders

- Clues about Competitor Strategies

- Potential Candidates for Partnership/Acquisition

- Occasionally, New Fields of Opportunity

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Another Question…

Why should you care

about market share?

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Another Question for You…

Does Big Co. Lead its Market?

34

2

Big Co.

1

5

2

BigCo.

3

6

7

Big Co.

5

Market1

Market2

Market3

0

20

40

60

80

100% 4671

2

3

5

Big Co.

Markets 1, 2 and 30

20

40

60

80

100%

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Relative Market Share

• Market Share quantitatively measures an organization’s position in its market

• Generally speaking, the higher the share, the better the position. The “Market Leader” has the highest share

• There are two primary ways to calculate…

• The most common is the least useful: Market Share = Revenue / Market Size (expressed as a % of total market)

• This first method is limited because it provides no insight into an organization’s share relative to its competitors. The second method solves that problem

• Relative Market Share = Revenues / Revenues of Most Important Competitor (expressed as a multiple, i.e., 1.0X, 0.6X, 3.4X, etc.)

• Often referred to as RMS

• For the market leader, the most important competitor is the 2nd largest player. For all others, it is the market leader

• Thus, only one organization in a market has an RMS > 1.0

• According to empirical studies across businesses, there is a strong positive correlation between RMS and margins

• Market leaders have the potential to earn the highest margins

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But Why?

The Experience Curve

• This relationship between relative share and profit potential is grounded in an idea called the experience curve

• The experience curve is an observed economic phenomenon which says that it is the nature of prices to decrease predictably as a function of cumulative production (accumulated experience)

• This effect can be observed repeatedly: in rapid growth or low growth businesses, in manufacturing and services, and across different value-added functions (production & marketing)

• The behavior of costs underlies this relationship

• Effect is driven by three major sources: scale, technology, and learning

• Competitors who have the most accumulated experience have the potential for the lowest costs, although poor management can obscure this reality

• Interestingly enough, market share leaders also command the highest prices

• Thus, a point of market share is worth more to a market leader than it is to any other competitor in the industry

• Market share, expressed in relative terms, determines long-term profitability

• Within a company, the relationship between profitability and a business’ competitive position is often dramatic

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A Powerful Relationship

RMS (Log Scale)

Re

turn

on

Sa

les

(%

of

Sa

les

)

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The Sensitech Example

U.S. Temperature Monitoring Market, 1998

Sensitech

B

C D

C

g .5g .8g

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The Sensitech Example

U.S. Temperature Monitoring Market, 2004

Sensitech

Sensitech

D

.5g .3g -

E F

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Relative Growth

0%

20%

40%

60%

80%

100%

0% 20% 40% 60% 80% 100%

Audrey CohenNE Illinois

SchoolDevelopment

ULC

Depaul (Urban)

ELOB

Avid

ATLAS

Modern Red

High Schoolsthat Work

Accelerated SchoolsCore Knowledge

LightspanCo-Nect

America'sChoice

DifferentWays ofKnowing

Coalition of Essential Schools

DirectInstruction

SFA/R&W

Other

Reference$25MM

Design Team Growth 03-04

Wh

ole

Sch

oo

l Re

form

Gro

wth

03

-04

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“Mechanics” vs. “Dynamics”

• As we discussed, market leaders have the potential to earn the highest margins

• Assuming good management, if companies grow at identical rates their margins will maintain constant relationship with one another

• Yet, this rarely happens in nature. In reality, companies grow at different rates

- Companies fail to meet the performance standards they require in new products because they willingly over-invest in weak competitive positions

- In so doing, the companies under-invest in advantaged positions

• When competitors grow at different rates, their market shares and cost positions change

- Share declines lead to lower margins

- Share increases lead to expanding margins

• In the long run, profitability changes are functions of relative growth

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Agenda

Important Themes in Strategy Development

The Strategic Value of Market Leadership

A Growth Planning Framework

Questions & Open Discussion

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A Question…

How do you systematically look

for growth?

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The Paradox of Leadership…

• Each point of market share is worth more to a leader than a follower

• Scale and experience curve economics

• Price premium

• Reinvestment potential

• The better your core business is performing the more likely there is potential for both top and bottom line improvement

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The Starting Point…

Your Core Business

CORE

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Adjacencies

Growth Opportunities That…

• Reinforce or defend the core business

• Leverage core business capabilities and assets

• Add value to customers in the core business

• Provide potential for leadership economics

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Developing New Opportunities

CORE

Technology

Channel

Geography Product / service

CapabilityCustomer /

customer segment

Backward integration

Forward integration

Local

Global expansion

New-to-world

New-to-company

Direct Indirect New segments

Microsegmentation of current segments

Leverage business processes

Knowledge management

Process and systems

Innovation

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The Further from the Core, The Lower the

Odds

Unrelated diversification (<1% success)

3 steps (7%)

2 steps (26%)

1 step (38%)

Core

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So, how do you measure economic

distance from the core business?

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Back to Business Definition…

Core

1 StepAdjacencies

2-3 Step:Adjacencies

Multi-Step Adjacencies

Diversification

Shared Costs

Shared Customers

Shared Channels

Shared Competitors

Shared Capabilities

Shared Technology

Shared Costs

Shared Customers

Shared Channels

Shared Competitors

Shared Capabilities

Shared Technology

Primary dimensionsPrimary dimensions

Full Share

Partial Share

No Share

Full Share

Partial Share

No Share

Full Share

Partial Share

No Share

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Odds of Success Vary by Vector…

FailureSuccess

NewGeography

NewChannel

NewBusiness

0 20 40 60 80 100%

27% average

Source: GE Equity

Forward / BackwardIntegration

New CustomerSegment

New Products& Services

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Opportunity Assessment

HighLowAttractiveness

Relatedness

Low

High

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The Success Loop

GenerateHigh Customer

Satisfaction

Invest inSuperiorProducts

AcquireNew

Customers

ProvideQualitySupport

SustainHigh Customer

Retention

FinancialSurplus

ExpandOrganizational

Resources

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Agenda

Important Themes in Strategy Development

The Strategic Value of Market Leadership

A Growth Planning Framework

Questions & Open Discussion

37Confidential

Do these ideas relate to your business?

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Magritte’s Caution…

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End of Document

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