McKinsey on Finance

High tech’s coming consolidation 1 Perspectives on Economic pressures to restructure high tech will eventually become irresistible. More acquisitions loom. and Strategy When efficient capital and operations go hand in hand 7 Number 11, Spring Olli-Pekka Kallasvuo, Nokia’s head of mobile phones and a former 2004 CFO, discusses strategic organization, performance measurement, and the value of financial transparency.

All P/Es are not created equal 12 High price-to-earnings ratios are about more than just growth. Understanding the ingredients that go into a strong multiple can help executives make the most of this strategic tool.

Putting value back in value-based management 16 Value-based management programs focus too much on measurement and too little on the management activities that create shareholder value. McKinsey on Finance is a quarterly publication written by experts and practitioners in McKinsey & Company’s Corporate Finance & Strategy Practice. It offers readers insights into value-creating strategies and the translation of those strategies into stock market performance. This and archive issues of McKinsey on Finance are available online at http://www.corporatefinance.mckinsey.com

McKinsey & Company is an international management-consulting firm serving corporate and government institutions from 85 offices in 47 countries. Editorial Board: Richard Dobbs, Marc Goedhart, Keiko Honda, Bill Javetski, Timothy Koller, Robert McNish, Dennis Swinford Editorial Contact: [email protected] Editor: Dennis Swinford External Relations Director: Joan Horrvich Design and Layout: Kim Bartko Circulation Manager: Kimberly Davenport Copyright © 2004 McKinsey & Company. All rights reserved. Cover images, left to right: © Paul Schulenburg/Stock Illustration Source/Images.com, Corbis, Bonnie Rieser/ Photodisc Green/Getty Images, Timothy Cook/Stock Illustration Source/Images.com This publication is not intended to be used as the basis for trading in the shares of any company or for undertaking any other complex or significant financial transaction without consulting appropriate professional advisers. No part of this publication may be copied or redistributed in any form without the prior written consent of McKinsey & Company. High tech’s coming consolidation | 1

sector’s leading industries. The indicators High tech’s coming we looked at included each industry’s fragmentation levels, maturity (as measured consolidation by growth rates), and profitability. We also considered incentives for consolidation, such as the need for scale to justify larger capital expenditures and the importance of scope to meet the customer’s changing needs.1

Where and how Economic pressures to restructure high tech We found strong signs of impending restructuring in 11 of the industries we will eventually become irresistible. More analyzed (Exhibit 1). These hot spots acquisitions loom. account for more than two-thirds of the sector’s revenues—a fact that speaks volumes about its ripeness for consolidation. Bertil E. Chappuis, For some time, the rules of economics In IT services, for example, professional and Kevin A. Frick, and appeared not to apply to the high- outsourcing services seem to be poised for Paul J. Roche technology sector. Growth slowed, profits an across-the-board restructuring. Software shrank, and investors eagerly awaited the is vulnerable in particular areas, such as billions of dollars in value likely to flow enterprise applications, network and systems from mergers, acquisitions, downsizings, management and security, middleware, and and liquidations. All signs pointed to an software for application servers. In imminent restructuring, yet until recently hardware, the targets are PCs and notebook little occurred. computers, networking gear, and storage systems; in semiconductors, they are logic, Today consolidation pressures are mounting memory, and semiconductor equipment. Our fast, and some segments have already research also found many small and midsize succumbed. Where operating systems for companies that are barely profitable, if at PCs, midrange computers, and mainframes all, with cost structures more appropriate to were once numerous, now only a few larger businesses (Exhibit 2). remain. Ditto for database software. Niche players in segments such as vertical-specific As economic forces take effect, companies applications may remain fragmented, thanks will jockey for increased scale or scope or in part to the unique nature of the value for some combination of both (Exhibit 3). propositions they offer. As in any sector, scale-driven mergers, which aim to streamline fixed costs over To develop a sense of how imminent greater volumes and to satisfy the demand consolidation really is, and to pinpoint the for bigger and more stable suppliers, will segments within and outside high tech that mostly take place between companies might encounter challenges or opportunities competing in the same industry. Customer in the trend, we investigated the extent to needs will also influence mergers that are which the economic forces driving undertaken to achieve advantages of scope. consolidation were at play in 21 of the Indeed, deals of this nature have already 2 | McKinsey on Finance | Spring 2004

exhibit 1

Ripe for restructuring

Key IT industries and segments,1 2002, % of revenues Ripe for restructuring Software ($146 billion)

• Enterprise applications • Database

• Operating systems • Desktop applications

Semiconductors ($174 billion) • Vertical applications • Storage

• Logic • Network/systems • Middleware, management, security application server • Microcomponents

• Memory

• Analog 17 • Semiconductor equipment 35 • Discrete Hardware ($299 billion) 20 • PCs/notebooks

• Servers 28 • Networking

• Printers

• Storage

IT services ($243 billion) • Smart handhelds

• Professional and outsourcing services

1 Metrics examined include market growth rate, 2002–07 (industry maturity); Herfindahl–Hirschman Index (fragmentation levels); number of top 10 companies with negative earnings before interest and taxes in 2002 (industry profitability); qualitative assessment of scale, scope, changes in customer buying behavior (incentives for consolidation). Source: McKinsey analysis

taken place: in response to financial fabrication plants. Consolidation has pressures and to the clamor of capital already taken place in certain pockets, such markets, companies that manufacture as deposition, diffusion, and lithography, technology products have been acquiring but the industry as a whole remains service firms. We expect such mergers to fragmented; only a handful of companies, proliferate as companies expand their including Applied Materials and Tokyo breadth of product or service offerings to Electron, have significant positions in more position themselves as preferred suppliers than one or two areas. The need to for big customers, to chase new consolidate will therefore inspire scale deals streams, and to hunt for cross-selling and in the few areas that are still fragmented multichannel synergies. (automation, assembly, and packaging), while demand for complete process-module The semiconductor-equipment industry, for solutions means that scope deals are likely one, is likely to see both scale and scope across industries. Vendors will thus capture come into play as companies prepare to sales and marketing synergies by selling to serve fewer and bigger semiconductor the same customer base. Moreover, an manufacturers, only some of which will be integrated solution across related areas able to finance next-generation research and (such as deposition and etching) can shorten High tech’s coming consolidation | 3

exhibit 2

Unsustainable

Average EBIT1 margin of public IT companies by revenues,2 2002, %

Revenues Software Hardware IT Services Semiconductors

<$50 million –320 –167 –29 –59

$50,000,000–$99,999,999 –1 –1 –3 –13

$100,000,000–$299,999,999 2 –1 4 –9

$300,000,000–$499,999,999 –2 2 5 –15

$500,000,000–$999,999,999 12 4 6 2

$1 billion–$5 billion 11 3 6 –4

>$5 billion 29 5 6 11

1 Earnings before interest and taxes. 2 Includes 2,121 companies worldwide in software (913), hardware (562), IT services (266), semiconductors (380). Source: Bloomberg; Thomson Financial; McKinsey analysis development cycles and ramp-up times. The the long view and the need to prepare for enterprise software market will restructure more hostile deals. along similar lines. Leaders and challengers Restructuring could also be triggered by When industries consolidate, market leaders companies that exit an industry altogether. and challengers can make acquisitions This is likely to happen in the PC business if within their industries to create economies some incumbents decide that the benefits of of scale or across industries to gain merging are questionable in light of the economies of scope. To know what to do industry’s deteriorating economics. Finally, and when, companies need to develop a where mergers and acquisitions don’t make perspective on restructuring trends and the sense, companies might forge alliances or way these affect their particular industry. To transform themselves without resorting to envision the likely endgame, they should alliances or M&A. consider shifts in customer behavior and the factors required for success. And as they Shape IT or leave IT make their moves, they must evaluate how The economic rationale for consolidation competitors will probably respond. might be similar in all sectors of the economy, but restructuring unfolds in ways Market leaders. In restructuring sectors, specific to each of them. In the same vein, market leaders aim to protect their position our perspective on how to respond to from challengers while seizing opportunities high-tech consolidation begins at a general to extend their dominance; they therefore level (Exhibit 4), then tackles specifics. make acquisitions to head off those We’ll examine the two classic roles— challengers and to increase their scale. In market leader and challenger—before the high-tech sector as a whole, market discussing the advantages for M&A of leaders should defend the customer base by 4 | McKinsey on Finance | Spring 2004

exhibit 3

Scale, scope, or skedaddle

Restructuring activity Drivers Examples Scale: peer consolidation • Improved fixed-cost structures (SG&A,1 R&D, • Logic depreciation) • Memory • Customer preference for bigger suppliers • Network/systems management, security • Network, platform effects • Storage hardware Scope: strategic cross- • Customer preference for broader-reaching suppliers • Database: middleware, application server segment moves • Channel, cross-selling synergies • Hardware: IT services • Technological synergies (such as those between • Networking hardware: storage networking and storage) hardware, software • Value migration from hardware to software, services • Semiconductor equipment • Maturing core businesses; capital market pressures for growth Exit • Desire to limit losses, free up capital • Logic • Refocusing resources on other businesses • PCs/notebooks

1 Selling, general, and administrative. Source: McKinsey analysis

tightening their control of the value chain scope acquisitions, and the company swiftly and customer relationships or by creating used its distribution capabilities to stake out scale advantages in R&D and sales. Oracle, strong positions in access solutions and for instance, is pursuing a broader footprint security. Microsoft’s purchase of Great and new growth in its play for PeopleSoft. Plains Software and Navision extended its reach into enterprise applications. EMC’s Scale offers efficiencies in large fixed costs— acquisition of Legato Systems presaged a essential in industries requiring massive move away from the slower-growth and up-front capital investment (like memory rapidly commoditizing storage-disk- chips) or expensive R&D (like software). It subsystem market and into the system- also extends control over the value chain. management-software market—a core Customers gain confidence in the vendor’s control point of an enterprise IT ability to provide long-term support services infrastructure. The company’s decision to and are more likely to choose it as a buy Documentum shows a similar move preferred supplier. HP’s merger with into content management. Compaq, for example, gave HP enhanced control over its value chain, cost synergies, For companies in some segments, and access to additional customers, to which such as IT services, scope deals offer it could now sell more comprehensive an opportunity to become the prime solutions. These factors should help HP integrator for customers’ needs; IBM’s compete with IBM and Dell. acquisition of the consulting arm of PricewaterhouseCoopers is a recent Scope acquisitions can broaden the example. A few words of warning should footprint of a leader and increase the be sounded, however: if the acquisition has dependence of its customers. Cisco Systems’ a different revenue model (as in the case of growth strategy in the 1990s was based on a hardware company acquiring a software High tech’s coming consolidation | 5

exhibit 4 management. In semiconductors, several The big picture companies could combine to form a large

Strategy chip maker focused on consumer

Type of company Scale Scope Exit electronics. (Beyond high tech, banks such Market leaders Grow bigger; Cross-sell to as Morgan Stanley and UBS Warburg have buy or block boost customer challengers dependence used scope combinations to reposition

Challengers Merge with Buy adjacent themselves as financial-services providers.) peers businesses Such deals challenge the acquirer to create a Small companies Carve out Maximize compelling value proposition and to build a sustainable niche sale value sales force that can communicate it Source: McKinsey analysis forcefully enough to displace incumbents. one), the buyer must avoid compromising If confronting the market leader directly is the target’s underlying business model. too risky, companies can pair up to carve out a defendable niche. IT service providers Challengers. Typically, a challenger in a could take this approach in health care, say, restructuring industry confronts industry if they found themselves unable to compete leaders by “rolling up” smaller companies more broadly. Aspiring niche players must to achieve scale or by merging with another assess whether they can create sustainable challenger, thereby driving radical cost- entry barriers based on proprietary structure changes through operational technology, innovation, industry knowledge, integration and redesigned business or locked-up customer ties. processes. PeopleSoft’s acquisition of J. D. Edwards in enterprise applications Selling out. Finally, the best way to recoup provides a good example of a challenger value is sometimes to sell part or all of a buying a peer to reduce operating costs. company. In this case, it is often wise to The combined company can use its larger move sooner rather than later to get the scale to become a preferred supplier to highest value for shares and to position the key customers. company in the most attractive light, which may mean shedding noncore assets. Such Alternatively, a challenger can attempt to moves sometimes unlock resources that can extend its scope by acquiring players in be reinvested to make a company stronger adjacent industries and combining the in more strategic segments. offerings into solutions, with the eventual aim of changing the basis of competition. The long view BEA Systems, for example, started with a Market reactions to merger announcements transaction-processing product and then, by tend to favor the target; fewer than half of acquiring companies such as WebLogic, high-tech acquirers see their shares rise after gained leadership in the application server disclosing their plans. No wonder boards and middleware market, where we expect and executives are wary of acquisitions. But further consolidation. Second-tier storage the most successful high-tech companies— and networking vendors could also benefit those averaging more than 39 percent from teaming up in this way, as might annual growth in returns to shareholders companies in middleware and network from 1989 to 2001—were serious deal 6 | McKinsey on Finance | Spring 2004

makers, undertaking almost twice as many Furthermore, as companies reach for scale acquisitions as their competitors.2 History and scope, they will attempt larger deals. also shows that companies with active While a hostile takeover is rarely the M&A agendas tend to outperform their preferred approach, these deals are likely to peers during and after industry downturns.3 become more common, especially when the Companies that avoid acquisitions often run target’s management has strong incentives out of steam, whereas enterprising acquirers to resist an acquisition that has real renew and refocus themselves. economic logic. For acquirers with deep pockets, cash offers may be more attractive Companies should be cognizant of, but not in hostile situations, when cash can give overly concerned with, investors’ short-term shareholders a low-risk way to take money reactions. Instead, they need to ensure that out of their investments. the long-term returns from their acquisition plans maximize shareholder value. Take Intel, which in recent years has acquired several suppliers of communications chips. The scale and extent of the coming shifts in Not all of the deals have been applauded as the high-tech sector promise to unlock successful by observers (for example, the tremendous value for companies that acquisition of Level One Communications), survive the consolidation. However quickly but together they helped Intel establish a change comes, those that act wisely can new communications growth platform on position themselves as the shapers of high which the company has built a multibillion- tech’s next era. MoF dollar business. The authors wish to acknowledge the contributions of High valuations can sometimes make Jukka Alanen and Jean-Francois Van Kerckhove, alliances more enticing than M&A, consultants in McKinsey’s Silicon Valley office. especially if synergies wouldn’t justify a full Bertil Chappuis ([email protected]) acquisition. Dell’s recent alliances with and Paul Roche ([email protected]) are EMC and Lexmark are examples of how principals in McKinsey’s Silicon Valley office, where these arrangements can be used as a low- Kevin Frick ([email protected]) is an risk step to broaden a company’s scope into associate principal. Copyright © 2004 McKinsey & new segments. Company. All rights reserved. More hostile deals

Most technology mergers have been small, 1 To measure the strength of each driver, we used qualitative friendly affairs financed by the acquirer’s and quantitative metrics such as the Herfindahl-Hirschman stock, but we expect that picture to change. Index (a common metric established by the US Department of Justice and the US Federal Trade Oracle’s attempt to acquire PeopleSoft is an Commission) to assess the current degree of early example of what could become the fragmentation. new reality in high-tech restructuring. 2 Kevin A. Frick and Alberto Torres, “Learning from high-tech Executives and boards should thus prepare deals,” The McKinsey Quarterly, 2002 Number 1, pp. 112–23. for hostile takeovers, cash deals, and the 3 Richard F. Dobbs, Tomas Karakolev, and Francis Malige, greater involvement of private equity “Learning to love recessions,” The McKinsey Quarterly, firms—all common in other sectors. 2002 special edition: Risk and resilience, pp. 6–9. When efficient capital and operations go hand in hand | 7

mobile-phones group after serving as chief When efficient capital financial officer from 1992 to 1996 and 1999 to 2003. A lawyer by training, and operations go hand Kallasvuo, 50, sees his move from finance to the leadership of the business group in hand responsible for most of Nokia’s profits as perfectly natural. In an interview conducted at Nokia headquarters outside Helsinki, Kallasvuo spoke to Fredrik Lind and Olli-Pekka Kallasvuo, Nokia’s head of mobile Risto Perttunen of McKinsey about Nokia’s phones and a former CFO, discusses strategic strategy, communicating with markets, and the CFO’s mind-set when operational and organization, performance measurement, and capital efficiencies go hand in hand. the value of financial transparency. McKinsey on Finance: What long-term trends in the handset business do you see, Fredrik Lind and Nokia’s transformation from a Finnish and how are they affecting Nokia’s strategy? Risto Perttunen conglomerate with its roots in pulp and paper to the world’s leading mobile-phone Kallasvuo: The biggest long-term trend is supplier has earned it a reputation as a our customers’ increasing mobility and, as a model of innovation, brand building, and result, their demands for ever more operational efficiency. Even during the sophisticated handsets. In one sense, it’s a severe downturn in the telecommunications kind of convergence of businesses into a industry the company maintained strong new business domain defined by mobility. margins on its sales of mobile phones. The result is that we’ll continue to see a Today Nokia runs 16 manufacturing very simplistic entry-level phone, with no facilities in 9 countries, conducts R&D in bells and whistles, on one hand, and on the 11 countries, and has more than 51,000 other hand we’ll see a multipurpose device employees around the world that has all sorts of capabilities, like mobile gaming or mobile imaging. This is what we Nokia is reorganizing itself yet again as it need to tackle at Nokia, and hence the anticipates increased demand for high-tech reorganization to align our structure to phones and other mobility products. different segments of this market. A base of four business groups—mobile phones, networks, multimedia, and MoF: How do you think about measuring enterprise solutions—will exploit scale performance? advantages across common functions such as finance, marketing, and operations to Kallasvuo: The thinking over the years provide maximum flexibility for business has definitely changed. We’ve learned to units. The goal: “to go after every market understand that for us, traditional measures in this industry and take share.” of performance like working capital, for example, are financial matters, yes, but So says Olli-Pekka Kallasvuo, who in more important they’re indicators of how January of this year was named head of the a company is performing operationally. 8 | McKinsey on Finance | Spring 2004

And if there were just one single thing to do to improve performance, it would have been done already. Improvement is usually Olli-Pekka Kallasvuo not about making a quantum leap; it’s

Vital statistics about taking small steps, improving a little • Born July 13, 1953, in Lavia, in western Finland bit every day. Nor is this about pushing

Education responsibility offto individual departments • Holds a Master of Laws degree from the University of Helsinki and saying, “You look at working capital,”

Career highlights or, “You look at inventory.” These are the • Nokia, Inc. (1980 to present) – Assistant vice president of the legal department (1987) responsibility of everyone at Nokia because – Assistant vice president of finance (1988) efficiency is the core of the business— – Senior vice president of finance (1990) – Executive vice president and chief financial officer (1992 to 1996) and then working capital becomes a – Corporate executive vice president, Nokia Americas (1997 to1998) – Chief financial officer (1999 to 2003) reflection of how efficient we are, and – Executive vice president and general manager of mobile phones at Nokia (2004–present) that’s why it’s such an important indicator that remains very high on our agenda even Fast facts • Served as chair and board member of Helsinki Stock Exchange from if financially it’s not critically relevant at 1991 to 1996 the moment. • Serves on the boards of: – Sampo, a Finnish full-service financial group – Nextrom Holding, a Swiss machine manufacturer – F-Secure, a Finnish company specializing in data security solutions MoF: Can the corporate team and the CFO • In spare time, enjoys golf, tennis, and reading about political history team contribute to and lead the different divisions and businesses on the working capital dimension? When I look at working capital, I really see it first as a reflection of efficiency and Kallasvuo: No; this is exactly the point. then as a reflection of where our capital is Efficiency is so intricately entwined in the invested, which is the reverse of the usual system that everyone has a stake in it, way of thinking. everyone is helping out. So if you were to start some big push for working capital at MoF: So how do you track the company’s Nokia, with a big headline saying, “Now we performance over time? are going to emphasize working capital,” or announce that suddenly financial concerns Kallasvuo: A more capital-intensive will drive everything, no one would business would probably look much more understand what you’re talking about. closely at its returns on investment, but Everyone understands that working capital is ROI just is not as useful a measure for a everyone’s job—by taking those little steps company that makes its money by investing to get logistics working even better. This is in people, in research and development, and one of our key competitive areas. in brand marketing. Measures of efficiency are much more helpful—operational MoF: Are there any particular structures efficiencies, production efficiencies, and yes, or processes at Nokia to make this financial efficiencies—and they really all go cooperation work? hand in hand. Production efficiencies and capital efficiencies are very relevant for Kallasvuo: In the end, it really comes down every finance person at Nokia. to a company’s business infrastructure and When efficient capital and operations go hand in hand | 9 how it operates in general. As we have system, in accordance with your accounting grown from a small, flexible player to such principles, those are your results. a large company, we’ve put considerable effort into combining flexibility and MoF: What is your view of the emergence economies of scale, which has an impact on of companies over the past year or so that how we operate. The emphasis has been on are minimizing their financial transparency doing everything we can to take advantage to the markets? of economies of scale where we can and where it makes sense, but not to centralize Kallasvuo: Of course, I can’t speak on anything that is business specific. We’ve behalf of other companies, but I feel that drawn that line very carefully. If something our investor base wants quarterly guidance. is business specific, it gets maximum It’s very much a matter of providing the flexibility, empowerment, decentralization. markets with the information they want, If it’s not business specific, then let’s take rather than telling them what we think they the economies of scale. The result has been should want. This isn’t brain surgery. If the an increasing platformization, if you will, of markets want information, you give them the business infrastructure. And here the information. business infrastructure means other than IT, so it’s a wider concept. The question has to be, how can we better understand what our investors want? The MoF: What have been the special challenges mind-set really needs to be that we must of communicating the results of a very fast- listen and communicate in terms of what is growing company to financial markets? expected. This is very relevant coming from a small market and growing into one of the Kallasvuo: Communicating results is easy. most traded shares in the world. We come Giving estimates is more of a challenge, from a context where we really didn’t have because in this type of fast-moving business the benefit of the doubt when it came to no one can really know what will happen our existence and our ability to deliver over over three months—no one. No system in the long-term. It really was an imperative to this world can make that prediction in a listen to what investors expected—if we did way that is certain. The best you can do is not have that mind-set, we never would communicate your best understanding to have become one of the most widely held the market at the time, which is actually shares in the United States. pretty simple. MoF: What is the optimal way to distribute At Nokia, we have been simply communi- value back to the shareholders—for example, cating our best possible understanding to through share buybacks or dividends? the market. We have not been playing games. I was personally criticized by some Kallasvuo: I don’t think there is a big investors for not playing games—for not difference between dividends and buybacks. giving an estimate and then exceeding it by In the end it’s a pragmatic choice, very one penny, which so many companies were much driven by tax questions and the doing. Now, of course, everyone feels this shareholder base. Otherwise they’re both way. Whatever numbers come out of the pretty equal from the financial perspective. 10 | McKinsey on Finance | Spring 2004

MoF: How important is it for a company to That became a real priority. For example, be listed in the United States? instead of having our US investor relations (IR) staff report to an IR executive in Kallasvuo: It’s really not possible to Helsinki, we located the IR head office for become a major name among US investors the entire company in the United States—and if you’re not represented in the US market then of course allocated a lot of resources in a major way. Being listed supports the and everything to make it work. Even the business, and the business supports the Helsinki-based IR office reported for many listing—which Nokia’s experience in the years to the US office. When it came to 1990s illustrates very well. Indeed, I communications, we said to ourselves, we would claim that without its listing in need to communicate like a US company. New York, Nokia would not have become Even today, if some capital-markets-related the market leader in the United States. legislation or other comes out of the United Furthermore, if it had not become a States that isn’t necessarily applicable to market leader in the United States, the non-US companies, we comply anyway, even share story would have been a lot less well- if the legislation does not, strictly speaking, known. When we first issued our IPO in apply. There is no other way for us. the United States, it wasn’t really that we needed US capital but rather that the listing Other companies have chosen exactly the would support the business, which is how other way: to be domestic first and it worked out. The result was a positive foremost, abiding primarily by their own spiral, if there is such a thing, each one government’s practices and legislation and supporting the other. domestic shareholders. Which one is wrong or right I can’t say. MoF: And how has that transformation changed your relationship with shareholders— MoF: And how comfortable are you with on both sides of the Atlantic? Nokia’s current level of transparency?

Kallasvuo: Sometime in 1995 or 1996, Kallasvuo: I can say that every time we have we became the first company in the world had a discussion internally about whether with a major market cap that had the we should go into this more transparent majority of its market capitalization coming reporting, and every time we have made a from outside its home country, as domestic decision to report instead of holding back, Finnish share dipped below 50 percent. the decision to report has been the right That happened very suddenly and decision, eventually. It’s what I feel. Not continued at a rapid pace. Other once have I looked back and thought, “Why companies have since found themselves in did we have to tell this?” But here again, similar positions, but not to the same I would suggest that theories aside, in our extent. So we basically said to ourselves, case it’s been a necessity. You are foreign. “Now we have to see ourselves as a Yo u are an ADR.1 Yo u d o n’t h av e the option US company and we have to do things in of not listening to what the market wants. the same way a US company would, because that’s what a majority of our MoF: Is there any risk, as Nokia begins investors will expect.” reporting separately for multimedia When efficient capital and operations go hand in hand | 11 handsets and enterprise solutions? What if MoF: In many companies, the role of the one unit doesn’t achieve very good results? CFO has been expanding on the traditional role in two directions: the first is a more Kallasvuo: No, definitely not. As I said, strategic-architect or strategic-planning type every time we’ve increased our transparency of role, even to the point of having M&A it was the right decision, so it must be the or strategy divisions; the second is moving right decision here too. And you have to also toward a more involved operations role, remember that external pressure is good for enhancing some business-controlling you. It makes you run even harder. The activities or leading corporate-pricing or people running those operations have even working-capital programs. What are your more reason to perform if external pressure thoughts on the evolution of the CFO role is there also. That’s been our experience. in general?

MoF: Has the CFO been a part of the Kallasvuo: If you assume a traditional sort strategic decision-making process in Nokia, of controller role as the starting point, then and do you see that role being strengthened yes, those are the two natural directions for in the future? the role to evolve. But because it varies depending on how the company operates, Kallasvuo: I don’t really think there is one it’s also possible that both of those roles and only one role for a CFO. Of course, the might even be combined. The latter role— role of a CFO has to be aligned with the way the more involved operations role—is the company operates, and it also depends particularly apt for the CFO of a major very much on the size of the company. But it business unit, which is very much an really can’t be the same in every company, in operational role in an operational unit. every business situation, and in every type of The former, more strategic role is more apt business a company is in. for a corporate, head-office CFO who operates, supervises, and oversees several At Nokia, being CFO has meant being business units. And both are quite relevant very much a part of the management at Nokia, too, because of how we operate team, looking at matters from a financial and how the roles of the business units or perspective but really not taking the role even business groups have been defined. of a finance guy who primarily becomes And I would also claim that the role of the the voice of that department. Instead of CFO must be aligned to the approach of defining the role in one way and taking the CEO. Without alignment, success is that into the management team, the CFO difficult. MoF at Nokia has a responsibility for the same decisions as everyone else on the Fredrik Lind ([email protected]) is a management team. Yes, of course, you principal in McKinsey’s Stockholm office, and might look at those decisions from a Risto Perttunen ([email protected]) certain perspective, but that doesn’t have is a director in the Helsinki office. Copyright © 2004 to mean that you always take the same McKinsey & Company. All rights reserved. sort of role. You have to be more versatile than that, which makes the role a very strategic one. 1 American depository receipt 12 | McKinsey on Finance | Spring 2004

yield an adequate return over the cost of All P/Es are not capital, it won’t create shareholder value. That means no boost to share price and no created equal increase in the P/E multiple. Executives who do not pay attention to both growth and returns on capital run the risk of achieving their growth objectives but leaving behind the benefits of a higher P/E and, more important, not creating value for High price-to-earnings ratios are about more shareholders. They may also discover that than growth. Understanding the ingredients that they have confused their portfolio and investment strategies by treating some high- go into a strong multiple can help executives P/E businesses as attractive growth make the most of this strategic tool. platforms when they are actually high- returning mature businesses with few growth prospects.3 Better understanding of Nidhi Chadda, When it comes to price-to-earnings ratios, the way growth and returns on capital Robert S. McNish, most executives understand that a high combine to shape each business’s multiple and Werner Rehm multiple enhances a company’s strategic can produce both better growth and better freedom. Among other benefits, strong investment decisions. multiples can provide more muscle to pursue acquisitions or cut the cost of Doing the math on multiples raising equity capital. Unfortunately, in The relationship between P/E multiples and their efforts to increase their P/E, many growth is basic arithmetic:4 high multiples executives reflexively try to crank up can result from high returns on capital in growth. Too many fail to appreciate the average or low-growth businesses just as important role that returns on capital easily as they can result from high growth. play in channeling growth into a high or But beware: any amount of growth at low low multiple. returns on capital will not lead to a high P/E, because such growth does not create Simply put, growth rates and multiples don’t shareholder value. move in lockstep. For instance, the retailer Williams-Sonoma has a P/E multiple of exhibit 1 about 21, based on earnings growth over Companies can have identical P/E multiples 15 percent in the past three to five years for dramatically different reasons and low returns on capital.1 By contrast, Coca-Cola has a slightly stronger P/E at 24, Expected Expected Implied P/E despite its lower growth rate.2 Coke’s ROIC growth multiple1 secret? Returns on capital over 45 percent Growth, Inc 14% 13% 17 relative to a 9 percent weighted average cost Returns, Inc 35% 5% 17 of capital.

1 Assuming 10% cost of equity, no debt, and 10 year’s excessive growth followed by 5% growth at historic levels of returns on invested capital. It’s common sense: growth requires Source: McKinsey analysis investment, and if the investment doesn’t All P/Es are not created equal | 13

exhibit 2 Because Growth, Inc., and Returns, Inc., Sustaining high growth requires considerably take very different routes to the same more reinvestment than sustaining high returns P/E multiple, it would make sense for a savvy executive to pursue different growth Growth, Inc1 Returns, Inc1 Year 1 Year 2 Year 1 Year 2 and investment strategies to increase each Operating profit less taxes 100 113 100 105 business’s P/E. Obviously, the rare company Reinvestment 93 105 14 15 that can combine high growth with high Free cash flow 78 8690 returns on capital should enjoy extremely Reinvestment rate Reinvestment rate 93% 14% high multiples.

The hard part: Disaggregating 1 Assuming 10% cost of equity, no debt, and 10 year’s excessive growth followed by 5% growth at historic levels of return on invested capital. multiples Source: McKinsey analysis Not many executives and analysts work to discern how much of a company’s current value can be attributed to expected growth To illustrate, consider two companies with or to returns on capital. Those who try identical P/E multiples of 17 but with often fail. To see why, consider one widely different mechanisms for creating value. used model to break down multiples as it (Exhibit 1). Growth, Inc., is expected to might be applied to a large consumer goods grow at an average annual rate of manufacturer and a fast-growing retailer 13 percent over the next ten years, while with similar P/E ratios (Exhibit 3). generating a 14 percent return on invested capital (ROIC) which is modestly higher The first step is to estimate the value of than its 10 percent cost of capital. To current earnings in perpetuity, assuming no sustain that level of growth, it must growth.6 The model then attributes the reinvest 93 cents from each dollar of remaining value to growth. The income (Exhibit 2). The relatively high interpretation from this simple two-part reinvestment rate means that Growth, Inc., approach would be that the market assumes turns only a small amount of earnings that the consumer goods manufacturer growth into free cash flow growth. Many would have better growth prospects than companies fit this growth profile, including the retailer. some that need to reinvest more than 100 percent of their earnings to support But this reading misleads because it doesn’t their growth rate. In contrast, take into account returns on capital. Returns, Inc., is expected to grow at only Discount retailers fight it out primarily on 5percent per year, a rate similar to long- price, which translates into lower margins term nominal GDP growth in the United and relatively low returns on capital—similar States.5 Unlike Growth, Inc., however, to Growth, Inc. In contrast, consumer goods Returns, Inc., invests its capital extremely companies compete in an environment where efficiently. With a return on capital of 35 brand equity can generate higher margins percent, it needs to reinvest only 14 cents and returns on capital, making them more of each dollar to sustain its growth. As its like Returns, Inc. In fact, the simple two-part earnings grow, Returns, Inc., methodically model is wrong. The discount retailer is turns them into free cash flow. actually expected to grow faster and to 14 | McKinsey on Finance | Spring 2004

exhibit 3

Traditional assessments of enterprise value can lead to a misinterpretation of where value comes from

100% = operating enterprise value

Traditional decomposition ROIC1-growth decomposition ROIC: 38% Consumer goods manufacturer, P/E: 20 2% 48% 52% Implied growth: 5.1% 48% 50% Fast-growing retailer, P/E: 20 50% 50% ROIC: 12% Implied growth: 9.5%2 50% 29% 21%

Value from current Value from future Value from current ROIC premium Value of earnings in perpetuity earnings performance expected growth with no growth

1 Return on invested capital. 2 From 2004 to 2018. Source: Compustat; Zacks; McKinsey analysis

create more value from growth than the on capital and growth in shaping a consumer goods company, whose high company’s P/E is to expand the simple would be primarily based on high two-part model and draw out a P/E returns on capital. premium for high returns on invested capital. This approach effectively An executive relying on the faulty analysis disaggregates value into three easily produced by such a simple model might flirt understood parts: with trouble. The CEO of the consumer- goods company Current performance. Current performance The best way to understand might increase is still estimated in the usual manner, as the the respective roles of returns investment or value of current after-tax operating earnings discount prices to in perpetuity, assuming no growth. on capital and growth in drive growth, Intuitively, this is the value of simply shaping a company’s P/E is potentially maintaining the investments the company destroying has already made. to expand the simple two- shareholder value part model to draw out a in the long run. By Return premium. This is the value a digging a little company delivers by earning superior premium for high returns deeper and returns on its growth capital. In order to on invested capital. appreciating the assess how a company’s return on role of returns on growth capital influences its P/E multiple, capital, the CEO would more likely focus on we recommend discounting a company’s protecting high returns and market share. cash flows as if they grew in perpetuity at some normalized rate, such as nominal Accounting for the ROIC premium GDP growth.7 Through repeated analyses, How can we avoid these misinterpretations we have found that the result is a good and still keep the analysis relatively simple? proxy for the premium a company enjoys In our experience, the best way to in the capital markets because of its high understand the respective roles of returns returns on future growth capital. In our All P/Es are not created equal | 15

example, the consumer goods manufacturer even determine that a top management would enjoy a large return premium, priority is to redirect some attention from consistent with its high historical returns growth to operations improvement. on capital.

Value from growth. This value represents High P/E multiples can serve as a powerful how much a company delivers by growing strategic tool. Executives who understand over and above nominal GDP growth. It can the complex chemistry of growth, returns, be calculated as that portion of the and P/E multiples will be better positioned company’s current market value that is not to make strategic and operating decisions captured in current performance or the that increase shareholder value. MoF return premium.8 While more sophisticated and time-consuming analyses are sometimes Nidhi Chadda ([email protected]) appropriate, in our experience executives and Werner Rehm ([email protected]) can learn a lot about their P/E multiple with are consultants in McKinsey’s New York office. this simple three- Rob McNish ([email protected]) is a While more sophisticated part model. principal in the Washington, DC, office. analyses are sometimes Copyright © 2004, McKinsey & Company. How might an All rights reserved. appropriate, executives can executive change learn a lot about their P/E his or her insights about the consumer 1 Adjusted for operating leases, Williams-Sonoma’s ROIC multiple with this simple goods company and has historically averaged about 10 percent, the same as its cost of capital. the discount retailer three-part model. 2 Coke reports earnings around 3 percent over the past using this three-part seven years.

model? The consumer goods company 3 Likewise, stock market investors can make the same would be seen to enjoy a large premium for mistake by thinking they are investing in high P/E “growth its return on capital. In the consumer goods stocks” when in fact some of these stocks are high- returning “value” investments. sector, preserving that return premium must 4 For instance, assuming perpetuity growth for a company be paramount, but anything the company without any financial leverage, P/E = (1 – growth/return on can do to increase its organic growth rate capital)/(cost of capital – growth). while preserving its return premium would 5 Real GDP growth over the past 40 years in the United translate directly into shareholder value and States was 3.5 percent. the possibility of a very high multiple. 6 At no growth, we assume that depreciation is equal to capital expenditure, and therefore net operating profits less adjusted taxes (NOPLAT) is equal to free cash flow for a In contrast, the CEO of the discount retailer business that does not grow. In effect, the first contributor would face a tiny premium for return on is calculated as NOPLAT divided by the company’s cost of capital. capital, since his or her company derives 7 This can be achieved without an explicit discounted cash most of its value from the rapid growth flow model by using, for example, the value driver formula prospects. Anything this company could do derived by Tom Copeland, Tim Koller, and Jack Murrin, to increase its ROIC, possibly even reining Valuation: Measuring and Managing the Value of Companies, third edition, New York: John Wiley & Sons, in its growth rate, would add value. By 2000.

applying the model to calibrate the trade-off 8 For a company that grows more slowly than GDP, this between growth and return, the CEO could value will be negative. 16 | McKinsey on Finance | Spring 2004

an anecdotal view of how the most Putting value back successful practitioners push the principles of VBM to achieve its real promise for in value-based shareholders. management Simply put, ailing VBM programs typically settle for merely measuring value creation in business initiatives, while successful approaches push to link tightly the Value-based management programs focus measurement to how the business can be too much on measurement and too little on improved. For example, some companies mechanically measure historical the management activities that create performance but then fail to apply what shareholder value. they’ve learned to the strategies from which value should flow. Most also neglect to account for future growth and Richard J. Benson- Value-based management (VBM) burst sustainability. Others make this important Armer, Richard F. onto the scene a decade ago with a link but then set targets in ways that fail to Dobbs, and Paul Todd revolutionary promise: a company that mobilize the troops needed to make VBM traded in traditional management pay off. Still others go to great lengths to approaches in favor of VBM could align its implement VBM programs but then relegate aspirations, mind-set, and management them to the finance department, where they processes with everyday decisions that truly languish without the commitment of senior- add shareholder value. Name the initiative— level management. investing in a new project, say, or spinning off a subsidiary, or implementing new Troubled VBM programs do not necessarily customer-service guidelines—and manifest all these symptoms at once. In our management could not only pinpoint better experience, however, the vast majority projects but also better understand the value suffer from at least one. Moreover, the best they would create for shareholders. Indeed, practitioners have learned to overcome them well-implemented VBM programs typically and can provide guidance about how to deliver a 5 to 15 percent increase in push VBM to better fulfill its potential. bottom-line results. Missing the link between Sadly, even as VBM has evolved, most measurement and value programs are notable more for their The original breakthrough of value-based implementation shortfalls than for their management was to draw attention to the successes. In our ongoing work and failure of traditional accounting measures, discussions with executives, we have begun such as net income and earnings per share, to identify a few common pitfalls that have to account for the cost of capital. repeatedly plagued underperforming Traditional managers focused far more VBM programs going back years as well as intently on improving cost and gross some newer wrinkles that stanch the benefits margin and paid little if any attention to that VBM can deliver. We’ve also developed the capital invested in the business. As a Putting value back in value-based management | 17

exhibit 1

Metrics designed to measure value have strengths—and weaknesses

Traditional P&L and balance sheet approaches Value creation: historical metrics Value: forward-looking metrics • Revenues • Return ratios • DCF1-value • EBITDA1 –ROE1 • Discounted EVA1 • Net income –ROCE,1 ROIC1 • IRR1 • Book value –ROA1 • CFROI1 • ROS1 • Economic profit or EVA1 • EPS1 (diluted or not) • Relevance for management declining, but still • Widely used concepts orientated • Required for active management of widely used by companies for communication to towards taking into account the company’s value investors (e.g., EPS) economic cost of the capital in the • Explicit consideration of growth and • Economic cost of the capital invested ignored business long-term impact of decisions • Growth, long-term performance, and sustainability • Growth, long-term performance, and • High correlation to market value of not taken into account sustainability not taken into account company • Much harder to measure accurately and so can be gamed

1 EBITDA = earnings before interest, taxes, depreciation, amortization; ROS = return on sales; EPS = earnings per share; ROE = ; ROCE = return on capital employed; ROIC = return on invested capital; ROA = ; EVA = economic value added; DCF = discounted cash flow; IRR = internal ; CFROI = cash flow Source: McKinsey analysis result, it was common to find projects in five years as measured by economic profit. which much of the capital deployed in But because the company delivered its businesses was wasted. growth by increasing prices, it ultimately damaged its customer franchise and could As managers focused on value creation and not sustain its growth rate. the true economic cost of capital deployed in the business, VBM proponents Companies that apply VBM at a more introduced metrics to measure a business’s advanced level move beyond measurement to or program’s value, including return on help the management team focus on the invested capital (ROIC), economic profit, levers that can be used to improve the cash flow return on investment (CFROI), or business. The best programs use value trees2 economic value added (EVA™).1 The to identify underlying drivers of operating advantages of different measures vary value. These have long been at the core of (Exhibit 1), but they all attempt to VBM theory, but we find that they are still recognize the cost of capital in the conspicuously missing in many applications. benchmarks managers use to gauge the value their decisions create. Savvy VBM practitioners use these trees to identify areas of improvement, pushing deep Yet many companies fall into the trap of into a business’s operating performance and focusing their measurement too much on comparing it with others to create clear historical returns, which are easily benchmarks. These benchmarks can also be quantified, and too little on more forward- pegged to the performance of peers outside looking contributors to value: growth and the company, or to the performance of sustainability. For instance, one consumer similar internal businesses. One particularly goods company (Exhibit 2) was able to informative and credible internal benchmark demonstrate strong economic returns for comes from analyzing the historical 18 | McKinsey on Finance | Spring 2004

exhibit 2 Consider the experience of one global Financial measures alone are inadequate consumer goods company. When the

Economic profit went up, to a point ...... but proved unsustainable, as market corporate technical manager ordered that all Year 1 = 100 share steadily declined, % the company’s bottling lines should achieve 200 60 75 percent operating efficiency, regardless of 160 50 their current level, some plant operators 40 120 rebelled. Operators at one US plant, Profit growth due 30 80 to price increases 20 concluding that at 53 percent their plant was 40 10 running as well as it had ever run, worked 0 0 only to maintain performance at historical 1357246 135724 6 Year Year levels. Yet after the plant launched an inclusive process to permit the operators to Source: McKinsey analysis set their own performance goals, they raised performance levels above the 75 percent performance of the same business over time. target over a period of only 14 months. For example, one processing company’s analysis found that daily performance alone The most effective VBM programs fine-tune varied so widely that the management team this dynamic even more. As they set targets, didn’t need to look for outside benchmarks. some build in a challenge from peers Instead, they could improve the overall running similar businesses. This approach performance of the company enough just by helps to stretch targets, to highlight focusing their efforts on the levers that led accountability in view of peers, and to to the most severe underperformance on create the sense of commitment and bad days. purpose that comes from collaborating on tough issues. Because colleagues running The error in focusing on targets similar businesses will be familiar with all rather than how they are set the opportunities for improvement, they A second common VBM pitfall stems from will be much more effective than line the way executives set performance targets managers at providing such challenges. and hand them down to the individuals Companies that have excelled at VBM responsible for meeting them. These targets programs arrange them not only on overall may seem perfectly reasonable to the profitability but also on capital expenditure, managers who set them, but they often growth, pricing, and costs—as well as appear arbitrary and unrealistic and convey performance during the year. Others create little sense of ownership to the teams that formal processes that encourage mutual receive them. In our experience, only when support among colleagues to improve the those assigned to meet the targets also performance of the business. At one of actively help in setting them is a company Canada’s largest privately held companies, likely to generate the understanding and for example, stronger performers are commitment needed to deliver outstanding explicitly assigned to help their colleagues performance (Exhibit 3). Indeed, we find who are not performing as well. the process of setting targets to be the single biggest factor in delivering superior Or consider how one chemical company VBM performance. designed a more effective way to review Putting value back in value-based management | 19

exhibit 3

Involve managers early in KPI1 definition process to ensure acceptance and accountability

Success factor This Not this Guided self-discovery • Managers discover the key value drivers and KPIs for • External team (or a staff team) does themselves the analysis and develops value drivers and KPIs • The process, rigor, and insights will be shared between units

Strong senior management leadership • Management actions and messages emphasize value • Senior managers, publicly or privately, creation and value-based shaping of the management communicate or act in ways that do not agenda reflect the value drivers and KPIs

Inclusive and open communication • Relevant staff is involved both in analysis and rollout, • Staff is told what the new value drivers with a clear understanding of the ultimate objective and KPIs are

Fact-based debate and challenge • Discussions and decisions are based on facts • Discussions and decisions are based on personal preferences and past actions

Link to ‘real deliverables’ • KPI framework leads to clear assignment of • KPI work is done separately from the accountabilities for targets and actions budget and targeting processes

1 Key performance indicator. Source: McKinsey analysis performance. A year after introducing a the meeting shifted away from individual VBM approach to make reported data successes and failures to a combination of more transparent, the company had yet to shared lessons and problem solving on see the improvements it expected. Worse, future risks and opportunities. nearly everyone in the organization recognized that official discussions about Next the company introduced a series of performance were something of a sham. peer meetings among unit leaders without Some managers misrepresented reports the division heads present. These meetings of their actual performance in order to aimed to review plans and identify risks and create the appearance of meeting targets; opportunities in order to set priorities for others built enough slack into future allocating capital and resources. In the first performance targets to make sure they year of operating under the new processes, would easily be met. capital outlays dropped 25 percent and underlying profits, adjusted for the usual The company’s response: change the review modulations of the business cycle, rose by process. What had been a one-on-one 10 percent. review involving the division head and unit leader became a broader discussion between Not ingraining VBM in day-to-day the division head and all unit leaders business processes together. And rather than simply reviewing Setting targets and committing to meet them the data, the meeting focused on the most is one thing. It’s another to make sure that important lessons from the previous performance targets are acted upon. This reporting period, as well as the greatest process happens by making certain that risks and opportunities expected to appear specific individuals are accountable and in the coming reporting period. Emphasis at responsible for making decisions and by 20 | McKinsey on Finance | Spring 2004

guaranteeing a link between performance individuals who fail to meet their targets and an individual’s evaluation process. more than once. By tying performance evaluation and compensation to individual One energy company, for example, objectives, performance can also be aligned implemented a VBM program that seemed with the objectives of the VBM program. to have all the right parts. But management then failed to carry it over from a discrete A rule of thumb: until a VBM program is program in the finance department to an integral part of how a company engage the manages, it will always be simply Until a VBM program is an entire company. “something else to do” and will inevitably integral part of how a company This result was fail as employees continue to perform as despite the fact they always have. Finance department input manages, it will always be that the is essential, for example, but delegating simply something else to do company’s VBM to the finance department as a finance team discrete, isolated program is a surefire way and will inevitably fail. developed a to snuffits potential. first-rate scorecard covering financial performance, operating drivers, organizational health, and customer service. Nearly a year later, Too few VBM programs have fulfilled their there was no discernible impact. Beyond early promise. But recognizing common top-level conversations, few of the patterns in programs that have gone awry is company’s managers used the scorecard— a first step in moving VBM closer to its goal some didn’t even know what it was. They to help line managers deliver better had had no involvement in the program’s performance for shareholders. MoF development, little understanding of why the new scorecard was necessary, and no Richard Benson-Armer (Richard_Benson- incentive to use it. The few that did use it [email protected]) is a principal in McKinsey’s found that targets regularly were missed. Toronto office. Richard Dobbs (Richard_Dobbs @McKinsey.com) is a principal in the London office, Some companies overcome this pitfall by where Paul Todd ([email protected]) is an using a formal performance contract to associate principal. Copyright © 2004 McKinsey & explicitly link the key performance Company. All rights reserved. indicators—such as sales, profit margin, return on investment, and customer The authors wish to acknowledge the valuable satisfaction—with roles such as sales contributions of Joe Hughes, Tim Koller, and manager, business unit manager, finance Carlos Murrieta to the development of this article. manager, and call-center manager respectively. This link forces an explicit conversation to take place about whether 1 EVA is a registered trade mark of Stern, Stewart & Co., roles and decision rights are correctly lined New York, and is synonymous with the more generic term, “economic profit.” up. Other companies link their people- 2 Tom Copeland, Tim Koller, and Jack Murrin, Valuation: evaluation system to hitting targets, with Measuring and Managing the Value of Companies, third explicit rules about dismissals for edition, New York: John Wiley & Sons, 2000. AMSTERDAM ANTWERP ATHENS ATLANTA AUCKLAND AUSTIN BANGKOK BARCELONA BEIJING BERLIN BOGOTA BOSTON BRUSSELS BUDAPEST BUENOS AIRES CARACAS CHARLOTTE CHICAGO CLEVELAND COLOGNE COPENHAGEN DALLAS DELHI DETROIT DUBAI DUBLIN DÜSSELDORF FRANKFURT GENEVA GOTHENBURG HAMBURG HELSINKI HONG KONG HOUSTON ISTANBUL JAKARTA JOHANNESBURG KUALA LUMPUR LISBON LONDON LOS ANGELES MADRID MANILA MELBOURNE MEXICO CITY MIAMI MILAN MINNEAPOLIS MONTERREY MONTRÉAL MOROCCO MOSCOW MUMBAI MUNICH NEW JERSEY NEW YORK OSLO PACIFIC NORTHWEST PARIS PITTSBURGH PRAGUE QATAR RIO DE JANEIRO ROME SAN FRANCISCO SANTIAGO SÃO PAULO SEOUL SHANGHAI SILICON VALLEY SINGAPORE STAMFORD STOCKHOLM STUTTGART SYDNEY TAIPEI TEL AVIV TOKYO TORONTO VERONA VIENNA WARSAW WASHINGTON, DC ZAGREB ZURICH Copyright © 2004 McKinsey & Company