Corporate Executive Board®

Teleconference Materials

The Collapse of Demand

Understanding It and Responding to It
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 Road Map for Today’s Presentation

The Crisis So Far

What Is Happening with Demand

What the Best Companies Will Do

How We Can Help

MLC1ASLIY5 © 2008 Corporate Executive Board. All Rights Reserved. 3

 Where We Left Off
Recent Months Have Dramatically Changed World Economies

Recent Economic Events and Stock Market Performance

Selected Highlights

Fannie Mae and Freddie Mac Fed buys short-term Coordinated interest rate cut; Japan in U.S. in recession since
placed in conservatorship. commercial debt. UK triggers bailout scheme. recession. December 2007.

September October November December

Lehman Brothers A.I.G. saved by $85B $700B Troubled Asset Relief U.S. GDP shrinks 0.3%;
files for bankruptcy. loan from the Fed. Program (TARP) signed into law. UK and Eurozone in recession.

Major Stock Indices

September–December 2008
11,250 6,000 DJIA
FTSE 100

10,000 5,000

DJIA FTSE 100

8,750 4,000

8,500 3,000

0 0
September October November December Source: Corporate Executive Board research.

MLC1ASLIY5 © 2008 Corporate Executive Board. All Rights Reserved. 4

 Credit Markets Still in Hiding
Massive interventions have …but lenders remain cautious
helped loosen credit somewhat…

TED Spread* Percentage of Loan Officers Tightening Standards

May 2008–December 2008 Commercial/Industrial and Credit Card Loans
5.0

100%
Credit Cards
C&I
50%

Hundreds 0%
of Basis 2.5
Points
(40%)
1996 1998 2000 2002 2004 2006 2008

Median WACC for A-Rated Companies

S&P 500
10%
0.0
9.1%
r
y

st

r
be
be

be

be
Ma

Jul
Jun

gu

m
to

m
m
Au

ce
ve
pte

Oc

No

De

5%
Se

5.7%
4.9%

0%
Q3 2006 Q3 2007 Q3 2008

* Difference between LIBOR and U.S. T-Bill rates—an indicator of banks’ willingness to lend. Source: U.S. Federal Reserve, Senior Loan Officer Survey; Corporate Executive Board research.

MLC1ASLIY5 © 2008 Corporate Executive Board. All Rights Reserved. 5

 Road Map for Today’s Presentation

The Crisis So Far

What Is Happening with Demand

What the Best Companies Will Do

How We Can Help

MLC1ASLIY5 © 2008 Corporate Executive Board. All Rights Reserved. 6

 Beyond Supply—What About Demand?
Plummeting consumer demand… …is dragging down business orders

Change in Real Personal Consumption Expenditures ISM New Order Diffusion Index
U.S., Durable and Nondurable Goods U.S., Manufactured Goods

Durable Goods
20% Nondurable Goods 65

50

Percentage
Change from 0% Index 45
Previous
Period

(20%) 25
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2006 2007 2008 2007 2008

Period Period

Source: Bureau of Economic Analysis; Institute for Supply

Management; Corporate Executive Board research.
MLC1ASLIY5 © 2008 Corporate Executive Board. All Rights Reserved. 7
 More to the Story
Customer Demand Will Remain Weak—for Reasons Beyond Access to Credit

Drivers of Changes to Demand

Declining Wealth De-Leveraging Behavioral Shifts

• Asset Value Deterioration • Debt Reduction • New Sensibilities

• Real Income Contraction • Savings Increases • Imprinting/Trait Formation

Source: Corporate Executive Board research.

MLC1ASLIY5 © 2008 Corporate Executive Board. All Rights Reserved. 8

 Driver #1: Declining Personal Wealth
Consumers feel poorer as …and rising prices squeeze budgets
their asset values shrink…

Percent Change Year-on-Year to Case-Shiller Index Consumer Price Index, 12-Month Changes
1998–2008 (YTD)
20
6%

10

(10)

(20)
3%

(30)
2000 2004 2008

U.S. Retirement Assets

Nominal Dollars, 2000–2008 (Q1)
$18 18.1 18.0 17.1
16.7 17.0 17.7 0%
13.8 14.9 1998 2000 2002 2004 2006 2008
11.7 11.3 10.6 12.5
Trillions
$9
of Dollars

$0
00 01 02 0 03 0 04 0 05 0 06 0 07 0 07 0 07 0 07 0 08
20 20 20 2 2 2 2 12 22 32 42 2
Q Q Q 1
Q Q Source: Bureau of Economic Analysis; The U.S. Retirement Market, First Quarter 2008,
Investment Company Institute; Haver Analytics; Corporate Executive Board research.

MLC1ASLIY5 © 2008 Corporate Executive Board. All Rights Reserved. 9

Driver #1: Declining Personal Wealth

An Inconvenient Truth
Consumers face a looming income drop… …with decade-old income levels

Decrease in Income During Downturns Median Real Household Income

1993–2007, 2007 Dollars
0%
Incomes have just recovered to
levels preceding last downturn.
$55,000

1969–1971

U.S. $42,500
Dollars
(3%)

1999–2004 $30,000

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
19 19 19 19 19 19 19 20 20 20 20 20 20 20 20

Year
1973–1975 1989–1993 1978–1983
(6%) Inflation-Adjusted Pre-Tax Family Incomes
Top of One Two Three Four Five Six U.S. 1990–2007, by Quintile
the Cycle Year Later Years Years Years Years Years
$350,000

Top 5%

U.S. $175,000
Dollars 1st Quintile
2nd
3rd
4th
$0 5th
1990 1994 1998 2002 2006
Source: Leonhardt, David, Next Victim of Turmoil May Be Your Salary, The New York Times, 15 October, 2008;
Income, Poverty and Health Insurance in the United States: 2007, U.S. Census Bureau, Current Population
Note: Median household income data are not available before 1967. Survey, 1968 to 2008 Annual Social and Economic Supplements; Corporate Executive Board research.

MLC1ASLIY5 © 2008 Corporate Executive Board. All Rights Reserved. 10

 Driver #2: De-Leveraging
After a decade of credit-fueled consumption… …consumers are reining in debt…

Household Liabilities as a Percentage of Assets Household Debt Growth

1955–2007 1990–2008 (Q2)

24%
12.0%
Percentage

Percentage
14% 6.0%

4% 0.0%
55 65 75 85 95 05 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 Q1 Q2
19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 08 08
20 20
Year
…and bringing savings back in line

Household Savings
5.0 As a Percentage of Income, 2000–2008 (Q3)

2.5

0.0

(1.0)
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Bureau of Economic Analysis; Federal Reserve, Flow of Funds Accounts
of the U.S.; Haver Analytics; Corporate Executive Board research.
MLC1ASLIY5 © 2008 Corporate Executive Board. All Rights Reserved. 11
 Driver #3: Behavioral Shifts
As consumers re-think …new sensibilities
what they are willing to buy… and norms are emerging

Hierarchy of Needs Top Changes Consumers Have Made

Percentage of Respondents Making Significant Change
Self Actualization 43.2%
Eat Outside the Home Less

Eat at Less Expensive Restaurants 39.3%

Esteem
Eat at Fast Food Restaurants Less Frequently 35.4%
Belonging Pack Lunch for Work 34.8%
Eat More Leftovers 32.4% Spend More
Safety Time at Home,
Order Less Food When You Go Out to Eat 29.7% Less Away
Reduce Number of Vacations 28.1%
Survival
Take Cheaper Vacations (Closer to Home) 28.1%
Attend More “Free” Activities 28.0%
(e.g., Hiking, Beach, Museums)
Entertain Friends at Home Instead of Going Out 27.0%
Prevalent Buying Mindset Buy Sale Items 38.0%
Buy More Store-Label Groceries 32.4%
(Not Buying Top Labels)
Use Coupons 32.1% Frugal
Shop at Less Expensive Stores 31.8% Shopping
Conspicuous Cool to 30.9%
Fewer Impulse Purchases at Register
Consumption Be Frugal Shift Away from More Expensive 28.3%
to Less Expensive Versions
Drive Less Overall 36.5%
Take Fewer Shopping Trips 35.5% Reducing
“Our retail and manufacturing clients are seeing Shop at Stores Closer to Home 34.8% Driving
almost an aversion to consumption.” Cut Down on Non-Work Driving 33.0%
Todd Lavieri Top 20 of All Changes Made (Average) 33.0%
CEO, Archstone Consulting Bottom 20 of All Changes Made (Average) 1.7%
November 2008

Source: Leinwand, Moeller and Shriram, “Consumer Spending in the Economic Downturn,” Booz &
Co., 2008; Saranow, Jennifer, “Luxury Consumer Scrimp for Sake of Planet, and Because It’s
Cheaper,” Wall Street Journal, 4 November 2008; Corporate Executive Board research.

MLC1ASLIY5 © 2008 Corporate Executive Board. All Rights Reserved. 12

Driver #3: Behavioral Shifts

Etching in Stone
The likely duration of the downturn… …will “imprint” new behaviors on a key segment

U.S. “Economically Formative” Population

Duration of U.S. Recessions Versus Selected Country Total Populations
2008
50 40
43
Contraction
Months in

25 Millions 35
13
16 of People
11 10 10 11 12
8 8 6 8 8

0 30
33 38 45 49 54 58 61 70 75 80 91 01 –? U.S. "Economically Total Population Total Population
h 19 19 r 19 r 19 y 19 il 19 y 19 r 19 h 19 y 19 19 r 20 007
e c Jul rch be
ar
c un be be Ma pr
J ua
r be
ar r2 Formative" Population of Poland of Canada
– M 37– cto cto 53– 7–A ebr vem –M 80– –Ma vem mbe (17–25 Years Old)
9 19 O O 19 5 F o 73 9 0 o e
92 5– 8– 19 0– –N 9 y 1 99 –N Dec
s t 1 May 194 194 July gust 196 969 er 1 uar ly 1 001
gu ry er il b Jan Ju 2
Au ua mb Au Apr er 1 vem ch
b r e b o ar
e v m N M
F No ce Comparison of Generational Economic Perspectives
De
Period
Cohort Depression Boomers Millenials
Estimates of Time to U.S. Economic Turnaround*

National Association of • Unbroken

Business Economists Mid 2009 • Income
Prevailing • Loss of wealth economic
stagnation
Economic • High growth
• Unprecedented
Conditions unemployment • Low real interest
volatility
OECD End of 2009 rates

Resultant • Risk aversion • Debt tolerance IN

Jerome Levy Contraction “Contained
Economic • Compulsive • High
•
O RK E S S
Forecasting Center Through End Depression” • W GR
of 2009 2011 ~ 2018 Behavior saving consumption
PRO
* GDP growth greater than 1% . Source: Levy, David, Entering a “Contained Depression,” Institutional Investor, (October 2008); Economists Predict Recession to Last
Through 2009, CNN Money.com, (3 November 2008); National Bureau of Economic Research, Business Cycle Expansions
and Contractions; U.S. Census Bureau, Monthly Estimate of Population; Corporate Executive Board research.

MLC1ASLIY5 © 2008 Corporate Executive Board. All Rights Reserved. 13

 Changes in Business Demand
Are Unfolding Similarly
Businesses also feel less wealthy… …and are learning new behaviors

F500 Operating Margin CFO Responses to the Economic Downturn

After Depreciation, 2000–2008 (Q3)
16%

Reduce All Other

82
Discretionary Spending 66

70
Reduce Future Hiring
8% 52

Reduce Current Employee 57 2008 Q3

Numbers 38 2008 Q1

56
Reduce Capital Spending
0% 38
2000 2002 2004 2006 2008
Reduce Spending on 41
Advertising and Marketing 25
Median WACC for A-Rated Companies 29
Shift Production or Support
S&P 500 Functions Overshore 13
10%
16
9.1% Reduce Dividend Payments
3
5% 0 50 100
5.7%
4.9% n = 105.

0%
Q3 2006 Q3 2007 Q3 2008
Source: Computstat; Deloitte; Corporate Executive Board research.
MLC1ASLIY5 © 2008 Corporate Executive Board. All Rights Reserved. 14
 In Summary
A Significantly Different Environment Poses New Problems for Executives

Our View

Because:
• We are only at the beginning of a significant economic shift in developed economies and the norms that
economic conditions create.
• Customer behaviors are in flux.
• The “real” downturn is likely to persist for more than four quarters—regardless of GDP recovery—as debt,
spending and income return to sustainable levels and excess capacity is absorbed.
• Many customers will carry behaviors learned during the downturn for life.

Executives will struggle to:

• Overcome uncertainty.
• Distinguish important customer behaviors.
• Compete on dimensions other than price.
• Adapt their value proposition—quickly.
• Profitably manage their product/service portfolios.

Source: Corporate Executive Board research.

MLC1ASLIY5 © 2008 Corporate Executive Board. All Rights Reserved. 15

 Road Map for Today’s Presentation

The Crisis So Far

What Is Happening with Demand

What the Best Companies Will Do

How We Can Help

MLC1ASLIY5 © 2008 Corporate Executive Board. All Rights Reserved. 16

 Recessions Radically Restack the Competition
Economic downturns change how investors perceive …with implications that last for years
the value of your sales relative to industry peers…

Change in Relative Market Cap to Sales Ratio Relative Market Premiums Before and After Downturns
1990–1991 Downturn, Versus Industry Peers Top Versus Bottom Quartile, Indexed

Downturns can more than double Firms who made it into the
the likelihood that a firm significantly top quartile during a downturn
changes its industry ranking. can significantly increase and
19% sustain their premium over
bottom quartile firms.
2.5
15%
Percentage of 2.3x 13%
Firms Moving 12%
Premium for 2.0

Up or Down 11% 11% Top Quartile

at Least One Versus Bottom
Quartile Firms, 1.5
Quartile in 8%
Market Cap Market Cap to
to Sales Ratio Sales 1.0

(indexed at 12
months before
economic bottom) 0.5

0.0
1989 1990 1991 1992 1993 1994 1995 -12 0 +12 +24 +36 +48 +60

n = 5,400 Companies Globally. n = 5,490 Companies Globally.

Source: Compustat; Corporate Executive Board research.

MLC1ASLIY5 © 2008 Corporate Executive Board. All Rights Reserved. 17

 Tactic #1: Embed Uncertainty in Planning
Sabre Builds Out Near-Term Scenarios as Part of Its Planning Process

Sabre’s Competitive Dynamics Modeling Exercise

2001

Origin of
Disruption Suppliers Competitors New Entrants Buyers

Socioeconomic
Nature of Airlines Drive Intermediaries Drive New Entrants Drive
Retrenchment Drives
Disruption Transformation Transformation Transformation
Transformation

1 2 3 4
Named
“Portal Power” “Solidarity” “Newcomers” “Global Cocooning”
Scenario

Description Airline alliances stabilize Alignment of agencies and Nontraditional marketing Economic, political, and social
through equity ownership or reservation systems increase powerhouses enter travel turmoil reduce appetite and
asset sharing. customer-centric services. retailing. ability to travel.

Implications • Defend against airline
strategies that adversely
impact nondirect channels.
• Invest aggressively in
operational and marketing
CRM.
• Operational efficiencies
enable intermediaries to
lower distribution and
marketing fees.
• Regulatory environment
constrains airline
consolidation.
• Create new business • Reservation systems and
models and align with travel agencies consolidate
innovative intermediaries and survive on significantly
to meet customer service reduced revenue streams.
and distribution needs. • Improve ease and comfort
of travel experience.

Source: Sabre Holdings Corporation; Corporate Strategy Board research; Business

Leadership Forum research; Corporate Executive Board research.

MLC1ASLIY5 © 2008 Corporate Executive Board. All Rights Reserved. 18


Insights from Scenario Process Guide Intelligent Response
Insight Severe drop in demand under
a “Global Cocooning” scenario
would put a premium on a lean
cost base.
SG&A
Action Sabre embarks on a global cost-
cutting program designed to save
$100 million annually, prior to
the travel slump caused by the 11
September 2001 attacks.
MLC1ASLIY5 © 2008 Corporate Executive Board. All Rights Reserved.
If—Then
Scenario-Driven Management Decisions
Ability to compete against merged
agencies and reservation systems
will be crucial to success under
the “Solidarity” scenario.
Sabre takes full control of partially
owned Travelocity online portal
to ensure direct access to buyers;
increases European presence
through Travelocity.co.uk.
19
Strong relationships with travel Despite industry hype about
agencies will enhance Sabre’s “game-changing” interactive
competitiveness under the television, genuine signals for
“Solidarity” scenario. “Newcomers” scenario are flat.
Sabre shares “Solidarity” scenario Unlike competitors, Sabre
with agencies to make the case avoids making sizable, premature
for collaboration and subsequently investments in the iTV distribution
rolls out the “Empowering channel, which has not yet yielded
Agenda,” a five-point plan designed the revenue anticipated by many.
to help travel agencies revamp
their business models.
Source: Michels, Jennifer, “Power Up: Sabre’s New Empowering Agenda Is Designed to Help Agents Take
Control of Their Future,” Travel Agent, (27 May 2002): 39; “Sabre Announces World Wide Strategic
Cost-Cutting Initiative,” PR Newswire, (28 August 2000); Sabre Holdings Corporation; Corporate
Strategy Board research; Business Leadership Forum research; Corporate Executive Board research.
 Tactic #2: Surface Changes in Value Drivers
As customers rapidly …the best companies are
re-prioritize needs… hunting for buying behavior changes

Hierarchy of Needs for Customers Approach #1: State and Test Key Assumptions
Illustrative
“We Assume” “But We Verify”
• Demand is inelastic
for loyal customers
• Service is key
component of offer
Association/Image •
•

Convenience

Identify assumptions underpinning Test them in key markets

Cost/Value current market strategy. using short cycle research

Approach #2: Track Lead Customers

Functional Utility
Leading Market Extreme Customers Key Questions
United Kingdom
Trust/Security Purchases Increase
• What were you buying before?
• Why did you shift to this
product?

Purchases Decrease
• What are you substituting with?
• What drove the decision?

Use customers in leading markets …to spot shifting priorities

who exhibit “extreme” behavior… that may “spread.”
Source: Corporate Executive Board research.

MLC1ASLIY5 © 2008 Corporate Executive Board. All Rights Reserved. 20

Tactic #2: Surface Changes in Value Drivers

Tell Me What You Want

Caremark Forces Customers to Trade-Off Product Attributes to Identify Key Value Drivers

Caremark Customer Scorecard

Joint discussion of metrics In the act of weighing performance metric

provides insight into customer importance, customers are forced to
performance drivers. make trade-offs between wants and needs.

Caremark Partnership Evaluation Form

Business Objective: Build a strong, long-term partnership including joint strategic planning, proactive account management, and delivery of innovative clinical initiatives to achieve
customer satisfaction focusing on health and cost containment.
Customer: Initech Corp.
Relative Caremark’s
Performance Category Key Performance Definition Key Performance Measures
Importance Performance
Value • Value in Caremark’s products and services • Quarterly Review of program savings 30% 4
provided to you as measured in financial terms, • Annual Client Review
and improvements in financial performance and
cost over time
Delivery • Caremark’s ability to fulfill service commitments • Mail turnaround time __% 40% 4
in a timely manner; this includes on-time deliv- • Paper Claim turnaround time __%
ery of the appropriate product or service • Call Center stats 30 sec. ASA, 5% ABN rate
• Proactive communication of industry news and • Quarterly review of communication efforts
information. e.g., New Drug Review

Quality • The degree of excellence achieved in core • Mail Order accuracy of 99.9% 20% 5
delivery areas • Paper Claim accuracy of 99%
• Reporting accuracy of 100%
Innovation • Caremark’s investment in time and resources, • Plan administration accuracy of 100% 0% n/a
to develop new products and/or service offer- • Increase electronic access to prescription benefit
ings to anticipate your needs for patients and Caremark Rx
Satisfaction • General perception of Caremark’s services, • Client Report Card 10% 5
products and behavior • Customer Service Responsiveness; Automated
• Flexibility and the ability to respond to constant Call Center Survey
change and reactive requests • Account Management Responsiveness

Concurrence: Totals 100% 4.5

Caremark
Name: Signature: Date:
Michael Bolton 01/07/2001
(Name) Client
Name: Signature: Date:
Bill Lomberg 01/07/2001

Record of performance against

customer goals over time serves as
valuable fact-based retention tool.

Source: Caremark; Corporate Executive Board research; Sales Executive Council research.

MLC1ASLIY5 © 2008 Corporate Executive Board. All Rights Reserved. 21

 Tactic #3: Explicitly Communicate
Differentiators That Matter
Facing retrenching customers that see …winners will crystallize
little difference among brand promises their most potent differentiators

Customer Perception of Quality Variance Vodafone’s Framework for Surfacing Critical Differentiators
Indexed to Product/Service Quality

Sales Experience 1.40 Current Desired

Customer Behavior Customer Behavior
“Who has the “I want to buy
Customer Service 1.33 best price?” from you.”

Effectiveness of 1.13
Communication

Value to Price Ratio 1.09

Current Customer Desired Customer
Reputation for Execution 1.06 Attitude/Perception Attitude/Perception
“I need the “I need the
cheapest most valuable
Product/Service Quality 1.00 thing.” thing, and you
have it.”

Brand Promise 0.99

“What would have to be true?”

Concentrate on the attributes of your
proposition that could change the attitudes
associated with desired behaviors.

Source: Vodafone; Market Research Executive Board research; Sales

Executive Council research; Corporate Executive Board research.

MLC1ASLIY5 © 2008 Corporate Executive Board. All Rights Reserved. 22

Tactic #3: Explicitly Communicate Differentiators That Matter

Differentiator Spotting
Volvo Sees Opportunities in Its Under-Valued Strengths

Framework for Exploring Potential Differentiators

Customers
Already See Low-Hanging Fruit
Value

Customers Do
Not See Value Opportunity

Common Strength Unique Strength

Volvo asks its sales and marketing teams:

• What is the impact of our unique strengths on
our customers’ economics?
• Why don’t all customers appreciate that value?

Source: Corporate Visions, Inc. Power Positioning Workshop; Volvo

Trucks North America; Sales Executive Council research;
Market Research Executive Board research.

MLC1ASLIY5 © 2008 Corporate Executive Board. All Rights Reserved. 23

 Tactic #4: Focus on Commercial Innovation
Adjust How—Not What—You Sell in the Near Term to Boost Indispensability

Commercial Innovation “Exploration Map” and Examples

Sales Experience Innovation Product Positioning Innovation

How can we reduce

customer effort/
cost relative to
• Grainger’s sales team alters its reps’ competitors? • Procter & Gamble changes the
pitch to teach customers about marketing communications
unappreciated inefficiencies in their supporting its Febreze brand from
own businesses. How can we improve What privileged “a product for deodorizing” (an
our customers’ knowledge or infrequent need) to “a finishing
• Not coincidentally, Grainger has knowledge and capabilities do we touch to a good cleaning job” (a
unique strengths in addressing capabilities through Customers have to help manage frequent need).
those inefficiencies, enabling the our buying process? customers’ risks?
firm to monetize its “teaching” • The repositioning dramatically
commitment. grows the product’s market size
How can we boost How can we expand as the frequency of consideration
our customers’ customer perceptions expands.
capacity for buying of our products and
our products and services to grow
services? demand?

Source: Sales Executive Council research; Business Leaders Forum research.

MLC1ASLIY5 © 2008 Corporate Executive Board. All Rights Reserved. 24

 Tactic #5: Optimize Your Offering to Profitability
Clorox Forces Determination of “Good” and “Bad” SKUs

Clorox’s SKU Assessment Process

Process Selection of Selection of Categorization of Setting of Assessment

Stage Strategic Driver Key Metrics Product Portfolio Hurdle Rates of SKUs

• Product decisions • SKUs are assessed on a • SKUs are grouped • Hurdle rates, which a • SKUs are assessed
may have multiple variety of performance for analysis according SKU must meet to be using a dashboard
competing strategic and profitability metrics. to multiple sets of considered “good,” are of metrics.
drivers. characteristics. not employed.
Conventional • Tracking numerous • Some business
Approach • Strategic goals are metrics for all SKUs • Hurdles for each of • SKU assessment units may be unable
frequently supplanted increases the difficulty of several metrics must be produces multiple to conduct the
by the needs of the setting hurdles. set for each of several categories of non- necessary analysis.
moment. groups. prescriptive conclusion.

One Key Two Basic Two Product Four Standard Two

Clorox Driver Metrics Types Hurdles SKU Types
Approach
Shareholder Return Profit and Volume* Large Brand and Small Brand Two Profit, Two Volume “Good” and “Bad”

* Defined in Project Acceleration Toolkit. Source: The Clorox Company; Supply Chain Executive Board research.

MLC1ASLIY5 © 2008 Corporate Executive Board. All Rights Reserved. 25

Tactic #5: Optimize Your Offering to Profitability

SKU Skew
Clorox Sets Simple Parameters to Identify “Good” and “Bad” SKUs

SKU Assessment Process

Selection of Selection of Categorization of Setting of Assessment

Strategic Driver
One Key Driver
Shareholder Return
Key Metrics Product Portfolio Hurdle Rates of SKUs
Four Standard
Two Basic Metrics Two Product Types Two SKU Types
Hurdles
Profit and Volume Large Brand and Small Brand “Good” and “Bad”
Two Profit, Two Volume

Two Profit Hurdles Two Volume Hurdles “Good” SKU Definition

Volume
Key Metrics Large Brand A “good” SKU is one that
• Inventory Holding • Remnant Costs
Small Brand
meets either the relevant
• Marketing Expenses • R&D Costs profit hurdle, volume
SKUs hurdle, or both.
Average per-SKU costs are Volume hurdles are set based
assessed for four key metrics. on actual per-SKU performance.

Avoid Perfection
“It’s more important to have your hurdle rates than to worry about getting them exactly right. It’s better to make a few educated choices
and act on them consistently than to struggle with accurately evaluating every single possible factor for a single, one-time rationalization.”
Kevin Pegels
Director of Supply Chain Planning
The Clorox Company

* All numbers illustrative. Source: The Clorox Company; Supply Chain Executive Board research.

MLC1ASLIY5 © 2008 Corporate Executive Board. All Rights Reserved. 26

 Road Map for Today’s Presentation

The Crisis So Far

What Is Happening with Demand

What the Best Companies Will Do

How We Can Help

MLC1ASLIY5 © 2008 Corporate Executive Board. All Rights Reserved. 27

 Here to Help
Our Resources Are at the Ready to Help You and Your Teams

Economic Downturn Support

https://www.mlc.executiveboard.com/Members/DecisionSupportCenters/EconomicDownturn/Manage.aspx

Use ideas from the best

companies to manage
risks, talent, customers,
and planning.

Monitor the most

recent economic
indicators across
key markets.

Learn about the

dynamics driving the
downturn and their
implications.

Source: Marketing Leadership Council research.

MLC1ASLIY5 © 2008 Corporate Executive Board. All Rights Reserved. 28

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