The 2013 Fit for Growth Index Study: How Ready Are You for Growth?
Vinay Couto and Ashok Divakaran

Booz and Company’s Fit for Growth* approach is a proven way forward for companies that want to cut costs and grow stronger. The Fit for Growth Index measures how well a company connects its cost and growth agendas by assessing companies in three key areas: strategic clarity and coherence with a clear and aligned set of capabilities; aligned resource base and cost structure; and supportive organization. The study analyzed nearly 200 public companies across a wide range of industries. Each company’s index score was calculated and compared with its total shareholder return over the past two years.



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Briefing

Vinay Couto Ashok Divakaran

The 2013 Fit for Growth Index Study How Ready Are You For Growth?

KEY HIGHLIGHTS • Booz & Company has found that sustainable company performance is driven by the extent to which companies are able to link their growth and cost agendas. • We developed the Fit for Growth* Index, a composite measurement of a company’s “health” along three critical dimensions: strategic clarity and coherence, resource alignment, and supportive organization. • There is a clear correlation between high Fit for Growth Index scores and market performance. Doing well on the three attributes of the index matters. • To maximize performance, companies need to be strong on all three index dimensions—doing well on one or two dimensions only will lead to suboptimal performance. • Companies fall into five archetypes, each with its own unique symptoms, challenges, and management priorities. • Executives need to recognize their current archetype, understand where they are weak, what they must change in order to become ready for growth, and develop a credible road map to link their growth and cost agendas.

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

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Guidelines: 11.0 million aölkdfölka Now that the global recession has subsided, how do we best position our company for growth? 32.8% 30.1%

Should we continue to push for cost cutting, or should we release funds to invest in growth?

How do we know whether we’ve cut too much, whether we’ve cut the muscle rather than just the fat?

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Letter format: - width for 3 c - width for 2 c How can we get our initiatives and priorities to be in line with our strategy? Is there still fat in our organization … and where shall we look for it?

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What are our highest-priority areas to invest in?

Why can’t we seem to make cost discipline sustainable?

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I. EXECUTIVE SUMMARY Since the 2008 economic crisis, many companies have been trying to figure out the best way to reposition themselves for growth and economic recovery. At Booz & Company, working with many leading businesses across a variety of industries, we have gained deep insights into what winning organizations do to return to sustainable high performance. It’s a combination of three things: • First, they create clarity and coherence in their strategy—being clear about how they’re adding value and articulating the differentiating capabilities they need to win in the marketplace. • Second, they put in place an optimized cost structure and approach to capital allocation—continuously investing in the capabilities critical to success, while proactively cutting costs in less critical areas to fund these investments. • Third, they build supportive organizations—redesigning structures, incentives, decision rights, information flows, skill sets, and other organizational and cultural elements so the collective actions of their people align more closely with their strategy. Such a Fit for Growth approach builds competitive muscle while cutting the corporate fat that weighs a company down. Companies that follow this approach take proactive and strategic cost actions (as opposed to reactive and tactical ones), freeing up funds to reinvest in those parts of the business that are most important for growth. At the same time, they put in place an organizational fabric that guides employees to do the right things day in and day out, thus helping the entire enterprise build and sustain competitive advantage. Having seen these three elements create value in the market, Booz & Company decided to actually measure the benefits of this Fit for Growth approach. In order to do so, we created a quantitative metric—the Fit for Growth Index (“the index”)—that is built on these three elements, and analyzed how it correlates with company performance. Main Findings of the Study As part of the study, we analyzed almost 200 public companies across a wide range of industries, compiling their index score and determining their total shareholder return over the past two years. Here are the main findings from our study: 1) There is a clear correlation between the Fit for Growth Index score and market performance. Companies that focus on the three elements—strategic clarity and coherence, resource alignment, and supportive organization—generate higher shareholder returns. 2) High-performing companies tightly link their growth and cost agendas. They clearly understand which capabilities are truly critical for winning with their strategy, and they funnel the bulk of their resources to those differentiating capabilities. 3) Few companies are ready to grow. Although the three dimensions to focus on may seem clear and the positive impact is obvious, less than one-fifth of the companies

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(17 percent) seem well prepared to grow. Very few companies—only 6 percent of those included in the study—perform well along all three dimensions of the Fit for Growth Index. 4) Companies fall into a set of five “archetypes” with common characteristics. Depending on where their strengths and weaknesses lie, companies fall into one of five broad archetypes. Each of those company archetypes has its own characteristics and challenges, and we’ve identified a specific set of recommendations for each. Implications for Management Few companies would disagree that robust strategies, solid cost management, and powerful organizations are critical to performance. But they may not be aware of how much these three elements need to reinforce one another. Combining them is the hard part: Our research shows that few companies are masters in integrating all three elements. Making improvements requires a dispassionate clear-headedness about one’s strengths and weaknesses, an understanding of where the links between strategy, resource management, and organization are broken, and the development of a clear plan of attack to reap the benefits.

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aölkdfölka 32.8%

II. THE Fit for Growth INDEX The Fit for Growth Index measures how well a company connects its cost and growth agendas. It assesses companies in three key areas: strategic clarity and coherence, resource alignment and supportive organization.

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Fit for Growth Framework Strategy & Way to Play - Clear articulation of how the business creates differentiated value for customers

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Strategic Clarity and Coherence - Clearly articulated and coherent strategy - Sustainable and differentiating capabilities for growth - Presence in critical product, market, and customer segments

Release Funds

Enable & Sustain Reductions

Resource Alignment
Invest in Higher ValueAdded Priorities

Supportive Organization - Organizational structure that is market-back and tied to the basic characteristics of the business - Coherent and supportive incentives, decision rights, skill sets, culture

- Lean cost structure in low-criticality areas - Proactive and tailored cost reduction actions - Systematic investments in differentiating capabilities

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Key Dimensions of Fit for Growth Index

A company’s Fit for Growth Index score is a weighted average of the company’s fitness (on a scale from 1 to 5) along each of those three dimensions. We developed the Fit for Growth Index so we could: • Determine how important the three elements—strategic clarity and coherence, resource alignment, and supportive organization—are for a company’s performance • Assess which of those elements is most important in driving performance • Identify common characteristics among companies that would allow us to formulate recommendations for how they can improve their readiness for growth.

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Plot of Sample Companies by

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III. COMPANIES WITH A HIGH Fit for Growth INDEX PERFORM BETTER To measure the connection to corporate performance, we determined the Fit for Growth Plot of Sample Companies by Fit for Growth* Index Score and Two-Year Normalized TSR Index score for close to 200 companies and compared it to the company’s total sharen = 197 holder returns over the two-year period from August 2010 to July 2012. We found a Capital One Financial Corp. Normalized TSR Plot of Sample Companies by strong correlation between companies’ shareholder returns and their Fit for Growth 100 Comcast Corporation Index scores. Limited Brands, Inc.
90 80 70 60
Whole Foods Market, Inc. U.S. Bancorp BlackRock, Inc.

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Correlation between Fit for Growth Index Score and Two-Year Normalized Diageo TSR Score Time Warner Cable Inc. n = 197
Luxottica Group SpA Capital One Financial Corporation Wal-Mart Stores Inc. Comcast Corporation Limited Brands Inc. Whole Foods Market Inc. U.S. Bancorp Diageo BlackRock, Inc. Time Warner Cable Inc. Luxottica Group SpA

50 Normalized TSR Score 100 40 90 30 80 20 70 10 60 0 50 40 30 20 10 0 1.0 1.5 2.0 2.5 3.0 1.0 1.5 2.0 2.5

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4.0 Stores Inc. 4.5 Wal-Mart

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Fit for Growth* Index Score

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Fit for Growth Index Score
Sources: Capital IQ database; Booz & Company Analysis

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Percentage of Companies in Specific TSR Score Band by Fit for Growth Index Score Band n = 197 High Fit for Growth INDEX score 64 Companies 19% TSR Score 34% Company’s Strategy & “Way to Play” 47%
Enable & Sustain Medium-High Reductions

107 Companies 16% 27%

26 Companies 42%

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- Articulates how the business creates differentiated value for 31% customers 45% 12% 27%

Release Low & Medium-Low Funds (1 3) Strategic Clarity

and Coherence

Low (0and - 25) Higher Medium-Low (25 - structure 50) (50 - 75) High (75 - 100) - Lean cost in Medium-High - Clearly-articulated - Organizational structure Value low-criticality areas coherent strategy that is market-back and Added tiedband to the basic Priorities Note: Width and of bars corresponds to number-of companies in each Fit for Growth Index score Proactive and tailored - Sustainable characteristics of the Sources: Capital IQ database; Booz & Company Analysis cost reduction actions differentiated capabilities business for growth - Systematic investments - Coherent and supportive in differentiating capabilities - Presence in critical incentives, decision rights, product, market, and • 73 percent of companies with high index scores had highskill or sets, medium-high TSR scores, cultures customer segments of “Fit for Growth and companies scoring Building-Blocks lower on the index also had *” lower TSR scores.

Invest in

High (3.1 - 3.7) Supportive (3.8 - 5) Resource Alignment Fit for Growth Index Score Band Organization

• The strength of the relationship between index score and TSR score varies by industry, but it is present in each of the 17 industry sectors we have analyzed.
Company’s Strategy & “Way to Play” - Articulates how the business creates differentiated value for customers

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Strategic Clarity and Coherence - Clearly-articulated and coherent strategy - Sustainable and

Release Funds

Enable & Sustain Reductions

Resource Alignment
Invest in Higher Value Added Priorities

Supportive Organization

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- Lean cost structure in low-criticality areas - Proactive and tailored

- Organizational structure that is market-back and tied to the basic

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IV. THE MOST IMPORTANT DRIVERS OF PERFORMANCE Once we had established the link between index scores and market returns, the next logical question became: What specific elements, if any, in the index framework best explain strong performance? Some of the factors within each of the three key building blocks—strategic clarity and coherence, resource alignment, and supportive organization—appear to have a particularly powerful impact on TSR scores. These include:

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Index Building Blocks and Sub-Factors with Particularly Strong TSR Impact Strategic Clarity: Coherent Strategy

Starting Questions for Managers - Does the strategy represent a differentiated way to play in the market? - Is the strategy reflected in a clearly stated list of firm-wide strategic priorities? - Is the strategy aligned with the changes in the market? - Is the strategy well documented? - Is there an objective and disciplined resource allocation process that focuses on strengthening differentiating capabilities? - Does the organizational structure enable nimble governance? - Are mechanisms in place to enable cross-business unit collaboration? - Is the organization efficient, flexible, and lean?

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Resource Alignment: Systematic investments in differentiating capabilities Supportive Organization: Speed and decisiveness in response to market or internal challenges

Strategic Clarity and Coherence

Release Funds

Enable & Sustain Reductions

Resource Alignment
Invest in Higher

Supportive Organization - Organizational structure that is market-back and tied to the basic characteristics of the business - Coherent and supportive incentives, decision rights, skill sets, cultures

- Lean cost structure in - Clearly-articulated and Value low-criticality areas coherent strategy Added Priorities - Proactive and tailored - Sustainable and cost reduction actions differentiated capabilities for growth - Systematic investments in differentiating capabilities - Presence in critical product, market, and customer segments Building-Blocks of “Fit for Growth*”

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V. FIVE COMPANY ARCHETYPES When analyzing how companies performed along the three dimensions of the Fit for Growth Index, we discovered a clear clustering of companies into five archetypes: five types of companies, each with its own set of characteristics. For each archetype, we developed recommendations for improving readiness to grow.
Strategically Adrift “Strategically adrift” companies have:
– An unclear strategy and critical priorities that are not widely understood, even among top management. – A lack of clarity as to the capabilities that are essential for them to win in their markets. – A reactive approach—their strategic decisions are easily swayed by external events, and competitors’ actions can easily propel them in new directions.

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Strategically Adrift

Action: “Strategically adrift” companies should focus on identifying their differentiating capabilities and develop a strategy that leverages those competitive advantages. Strategic Resource Supportive Clarity and Alignment Organization Coherence

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Distracted

A4 format: - width for 3 colu - width for 2 colu “Distracted” companies have:
+ Moderate effectiveness and efficiency. – Some critical capabilities present as “table stakes” for the industry, but they are not distinctive enough to serve as a competitive advantage. – A strategy that is not focused enough to mobilize investment. Action: “Distracted” companies should sharpen their strategic focus and align the company around those capabilities that give them a right to win.

Distracted
Capability Constrained

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In the Game
Strategic Resource Supportive Clarity and Alignment Organization Coherence

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Ready For Growth

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Capability Constrained

“Capability constrained” companies have:
+ A big-picture understanding of what it takes to win, but they need more discipline in execution. + Terrific strategies, and a coherent and clearly articulated set of capabilities. – Cost structures and approaches to investment management that aren’t keeping pace with their intent. – Strategies and capabilities systems that aren’t as effective as they could be; and inadequate practices, processes, or technologies that often hold them back

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ategically Adrift

Distracted

bility Constrained

n the Game dy For Growth

Strategic Resource Supportive Action: “Capability constrained” companies should be very clear about what exact Clarity and Alignment Organization capabilities they need and then work on processes, systems, skills, behaviors, and Coherence organization—all together—to become world-class at what’s most important for them.

In the Game

“In the game” companies have:
+ Strategic focus. + A diligent approach to capability building. + Good market effectiveness. – Suboptimal organization, e.g., complicated matrix structures and onerous governance processes that undermine speed and effectiveness. Action: “In the game” companies should focus on internal structures and processes. They need to realign their management structures, decision making, and talent to support strategic priorities.

Strategic Resource Supportive Clarity and Alignment Organization Coherence

Ready for Growth

“Ready for growth” companies are firing on all three cylinders. They have:
+ Well-developed strategic capabilities that also are well understood throughout the organization. + Systematic ways to direct resources to initiatives with the highest strategic and financial returns. + Organizational structures that support key capabilities, with talent in the right places and efficient decision making.

The market success of “ready for growth” companies rests on a foundation of coherent, Strategic Resource Supportive proven, and sustainable capabilities, not transitory factors like managerial talent or favorable Clarity and Alignment Organization market conditions. Coherence

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Distribution of Archetypes across Sample Companies

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Strategically Adrift Distracted

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Capability Constrained

In the Game

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Ready for Growth

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• Among the 197 companies that we studied, only 17 percent were classified as “in the game” or “ready for growth” and thus well equipped for expansion.

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VI. WHAT A “READY FOR GROWTH” COMPANY LOOKS LIKE Every company is different; however, our analysis revealed a set of charac­ te­ ris­ tics that are common to many of the companies in the strongest (“ready for growth”) archetype. Consider these elements across the three building blocks of the Fit for Growth framework: • Strategic Clarity and Coherence—“ready for growth” companies … o Have specific and actionable strategic priorities that are widely understood at all levels of the company o Make clear choices, striving for best-in-class status only in the few distinctive capabilities that create sustainable competitive advantage, and accept “good enough” in other areas o Are able to keep their strategies relevant by sensing and rapidly adapting to market changes o Are quicker to innovate, willing to make calculated big bets o Feel no qualms about killing investments that aren’t paying off. • Resource Alignment—“ready for growth” companies … o Employ a disciplined process that ensures adequate funding for high-growth, core Starting Questions for Managers activities - Is the strategy aligned with the criteria changes in o Have clear and objective investment that prevent department rivalries from the market? interfering with allocation of funds to top corporate priorities - Is the strategy well-documented? o Manage spending strategically, making rigorous trade-offs based on cost transpar- Does the strategy represent a differentiated ency and a deep understanding of how they make money. way to play in the market?
firm-wide strategic priorities? • Supportive Organization —“ready for growth” companies … o Are organizationally efficient, flexible, and lean - Does the firm have an objective and disciplined o Align their power structures and allocate decision rights in ways that best serve resource allocation process that focuses on strengthening differentiating capabilities? strategic priorities and business realities o Create nimble mechanisms for governance and collaboration across business units Does the organizational structure enable o Have talent -management practices that support key capabilities by moving the best nimble governance? people into -pivotal roles Are mechanisms in place to enable cross-BU collaboration? o Have a coherent culture that sets norms and expectations that reflect the require- Is the organization efficient, flexible and lean? ments for success in the marketplace o Have an ethos of excellence and continuous improvement that is reinforced by meritocratic systems. - Does the company have a clearly stated list of

Element

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Coherent Strategy

Supportive Culture Strong Leadership in Key Roles

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STRATEGIC CLARITY AND COHERENCE

Strong Capabilities

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Strong and Coherent Product Portfolio Presence in Critical Markets

“Ready for Growth” Company

Decisiveness with respect to Market & Internal Challenges Improvement Initiatives Aligned with Strategy

Systematic Thoughtful Investments in Cost Differentiating Reduction Capabilities

RESOURCE ALIGNMENT

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VII. INDUSTRY CASE STUDY: Fit for Growth INDEX IN THE CONSUMER PACKAGED GOODS SECTOR We conducted a deep-dive on the consumer packaged goods (CPG) industry to assess how the Fit for Growth Index impacts company performance in a specific industry.

The Fit for Growth Index and Consumer Packaged Goods

Normalized TSR Score 100 Financial Performance (Normalized TSR Score)
Constellation Brands Anheuser-Busch InBev Brown-Forman

80
Kimberly-Clark Mattel

Church & Dwight

60

Whirlpool Newell Rubbermaid Clorox PepsiCo

Colgate-Palmolive Diageo Coca-Cola ConAgra Foods J.M. Smucker General Mills Kellogg Campbell Soup

40

Molson Coors Brewing Tyson Foods American Greetings

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Avon Products

0 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

Fit for Growth Index Score

• Consistent with the cross-industry findings, our analysis in the CPG sector showed close correlation between companies’ Fit for Growth Index scores and their shareholder returns: o Companies such as the Kimberly-Clark Corporation, Mattel Inc., and the BrownForman Corporation have demonstrated an ability to produce sustained shareholder value. They also score high on the Fit for Growth Index. o Consumer products manufacturers with low index scores, such as Avon and American Greetings, have also produced lower two-year total shareholder returns. • The data also revealed which components of the index have the greatest impact on shareholder returns: o Differences between high- and low-performing companies were greatest in factors related to strategic clarity and coherence, and resource alignment. o Differences between high- and medium-performing companies were greatest in the supportive organization category.

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For deeper insight, we examined two particularly strong performers that embody the key principles of the Fit for Growth approach. • DIAGEO: Diageo is a global alcoholic beverages company with global brands including Johnnie Walker, Smirnoff, and Guinness. Diageo sells in more than 180 countries and derives 40 percent of its sales from emerging markets. Overarching growth strategy: Comcast Corporation Expanding leading brands into new markets, with a tailored approach for each Limited Brands, Inc. market that capitalizes on Diageo’s supply chain and distribution channel advantages. Whole Foods Market, Inc. U.S. Bancorp BlackRock, Inc. Diageo Resource alignment Supportive organization Time Warner Cable Inc. Strategic clarity Luxottica Group SpA Diageo manages costs and - Diageo has built a fit-for - Diageo relies on a small set of differentiating capabilities: investments to strengthen purpose, efficient, and Inc. Wal-Mart Stores marketing; supply chain, these key capabilities, in effective organization. part by seeking efficiencies and distribution channel - Diageo’s geographic innovation; and in other areas, e.g. organization maximizes efficiencies; joint business planning with - careful strategic sourcing brand value by combining customers (known as the of ingredients and other a focus on individual growth “Diageo Way of Selling”). direct materials markets with a global Capabilities are adapted to marketing support system. - operational optimization - meet the needs of local - Employee satisfaction - alignment of supply markets. For example, Diageo scores are high, with many a premium image, footprint with growth praising Diageo for its cultivates and emphasizes product opportunities meritocratic culture, focus innovation to middle-class - use of value-enhancing on results over “face time,” consumers in emerging routes to market in strong leadership, social markets. emerging markets responsibility, diversity, and work/life balance. • CHURCH & DWIGHT: Church & Dwight has assembled a strong portfolio of homecare and personal-care brands in both the premium and value categories. Overarching strategy: Identifying and acquiring niche brands with untapped residual equity, and mining this value by giving the brands wide distribution and prominent shelf space, then cross-pollinating and extending the brands into adjacent categories Strategic clarity Resource alignment Supportive organization - This strategy requires superior - Investments focus on brand - Church & Dwight fosters a capabilities in areas such as development and marketing highly performance- and brand extension, innovating in for a small set of “power results-focused financial categories where a brand is brands” that drive growth at culture, supported by the market leader, and “fast the company. aggressive cost management. following” in niches where it - Innovation investments are is a value player. intentional, focusing on - Church & Dwight develops breakthroughs in areas of these capabilities through market leadership (e.g., resource alignment. Trojan), and closely following market leaders in value niches (e.g., Arm & Hammer). The approach has paid off for shareholders. Church & Dwight’s total shareholder returns have ranked among the consumer products industry leaders for most of the past decade.

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VIII. Methodology • Our survey sample comprised 197 companies in 17 industries. Companies were chosen to yield a balanced sample including high, low, and moderate financial performers in each industry, based on their total shareholder returns over a two-year period (November 2010 – November 2012). • The Fit for Growth Index was designed such that it assesses companies in three key areas: strategic clarity and coherence; resource alignments; and supportive organization. o Each company received a composite score on a scale of 1 to 5 based on its “fitness” in each of these areas. o In calculating the Fit for Growth Index score, we weighted the three factors as follows: strategic clarity and coherence (50 percent), resource alignment (30 percent), supportive organization (20 percent). The second and third factors —the aligned resource base and the supportive organization—together make up a company’s execution capability. Thus, a company’s index score is derived in equal parts from its strategy and executional fitness. These weightings reflect our belief that strategy and execution are equally important in determining performance. o The three factors were, in turn, made up of several components, each with its own weighting. These components are: - Strategic clarity and coherence: coherent strategy (15 percent), strong capabilities (10 percent), strong and coherent product portfolio (10 percent), presence in critical markets (15 percent) - Resource alignment: systematic investments in differentiating capabilities (10 percent), thoughtful cost reduction (15 percent), improvement initiatives aligned with strategy (5 percent) - Supportive organization: speed and decisiveness (10 percent), strong leadership (5 percent), supportive culture (5 percent) o To supplement our own knowledge of the companies, we examined information from research databases, analysts’ reports, earnings call transcripts, and business periodicals. • For each company, we determined a normalized TSR score. o TSR scores are between 0 and 100, with 100 representing the company with the highest returns in its industry segment, and 0 representing the lowest. o This form of normalization allows us to insulate TSR results from external factors that might affect some sectors more than others—for example, higher-than-usual exposure to declines in spending due to the recession.

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For Further Information Fit for Growth microsite page (http://www.booz.com/global/home/what-we-think/fitforgrowth)

Press Inquiries: Siobhan Ford Director, North America Marketing Booz & Company Telephone: +1-212-551-6234 Email: [email protected]

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Booz & Company is a leading global management consulting firm focused on serving and shaping the senior agenda of the world’s leading institutions. Our founder, Edwin Booz, launched the profession when he established the first management consulting firm in Chicago in 1914. Today, we operate globally with more than 3,000 people in 58 offices around the world. We believe passionately that essential advantage lies within and that a few differentiating capabilities drive any organization’s identity and success. We work with our clients to discover and build those capabilities that give them the right to win in their chosen markets. We are a firm of practical strategists known for our functional expertise, industry foresight, and “sleeves rolled up” approach to working with our clients. To learn more about Booz & Company or to access its thought leadership, visit booz.com. Our awardwinning management magazine, strategy+business, is available at strategy-business.com.

©2013 Booz & Company Inc.

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