Marketing & Sales Roundtable Sizing and Validating the Opportunity in Emerging Markets July 2002

©2002 Li z Arrington 2 11:30–Introductions/Objectives 11:45–Presentation and Discussion 1:15–Summary and Wrap-up Agenda

©2002 Li z Arrington 3 Objective for and uses of market size information Market-sizing project process Market-sizing process tips Total available market (TAM) Served available market (SAM) Share of market (SOM) Reviewing implications of market information Appendix Contents

©2002 Li z Arrington 4 Objective of Market-Sizing To quantify and validate the business opportunity in order to paint a compelling and defensible picture of that opportunity for stakeholders Investors Company personnel Customers Partners Market analysts/press What makes it difficult?

©2002 Li z Arrington 5 Uses of Market Size Information Fundraising Business planning Validation of business and pricing model assumptions Competitive analysis Resource planning Prioritization of customer segments and associated product development efforts Prioritization of account opportunities Identifying and characterizing major market swings Measuring progress against the market opportunity

©2002 Li z Arrington 6 Market-Sizing Project Process Define business strategy assumptions Set timeframe and growth metrics Identify relevant analogs Model market from 3 perspectives Highlight market trends, discuss key implications Positioning strategy - Market and customer segmentation - Critical need - Competitive differentiation Business and pricing models Partnership and channel strategy 3-5 years 1 year of actual market segment numbers Annual growth rates 3-5 year CAGRs Market penetration rates Financial analysts Market analysts Trade associations Public Co. information Trade journals Channel partners Total Available Market (TAM) Served Available Market (SAM) Share of Market (SOM) Marketing Sales Finance Engineering Operations Select best information sources Products Markets Industries

©2002 Li z Arrington 7 Market-Sizing Process Tips Be conservative in establishing baseline assumptions Recognize that exact numbers will not be available and get comfortable with making educated assumptions Be open to use of analogs that share relevant characteristics List and research all sources of potential competition, direct and indirect Use established, reputable, recent (3-6 months old) information sources and compare them against one another for consistency Financial analysts (Investex): Goldman Sachs, Merrill Lynch, Morgan Stanley, Salomon Smith Barney, Robertson-Stephens… Market analysts: Forrester, Gartner-Dataquest, IDC, Meta, Probe, RHK, Yankee… Trade associations and trade journals Company (competitor, customer, etc.) information: annual reports, filings and investor presentations, press releases…for public companies see Edgar, 10K Wizard Channel partners and personal networks Design Excel model for flexibility, reflecting assumptions in editable variables that enable sensitivity analysis (support from an Excel whiz is an absolute necessity!)

©2002 Li z Arrington 8 Total Available Market (TAM) Definition : Total units/$ available at all potential customer companies for relevant categories of products/services and applications Approach: Top-down analysis using market forecast data Define potential customer spending data to collect: geography market category product category applications Estimate total potential product/service (or application) spending for 5 years (TAM), including sanity checks Research spending on current (analyst-tracked) solutions for potential applications* If product category is not yet tracked by analysts Extrapolate from higher-level budget category data: Define categories (e.g. Capex,R&D) Develop percentages assumptions, validating with analogs for which market data is available If customer spending numbers do not exist * Note: If competition is in-house solution, estimate and validate costs (e.g Human Resource)

©2002 Li z Arrington 9 Served Available Market (SAM) Definition : 100% of the units/$ available from addressable customer companies for addressable percentages of applications that company can serve. Approach: Top-down analysis using market forecast data Define percentage of applications/customers that product/service can address Technical capability of company Market adoption of technology Geographic reach Target customer segments Compare SAM to TAM (SAM should be lower!) Apply addressable percentages to TAM numbers to estimate relevant customer and application spending (SAM) for 5 years Note: For markets with a clearly-defined universe of potential applications and customer companies, a bottom-up analysis (using company sales and pricing assumptions) can be used to validate pricing strategy

©2002 Li z Arrington 10 Share of Market (SOM) Definition : Projected company penetration of the SAM by year Approach: Bottom-up analysis applying company pricing model to per customer company and/or application sales assumptions Define target market & customer segments Named customers and applications in priority segments Installed base and growth assumptions for partner products/service Develop penetration (unit sales) assumptions given planned company and channel resources Which customers or installed base What level of penetration of an account over what period of time Apply pricing model to unit sales assumptions to calculate SOM for 5 years Compare SOM to SAM to TAM -SOM should be lowest number (<10% of TAM) -SOM should exceed actual revenue projections

©2002 Li z Arrington 11 Reviewing Implications Re-evaluate all business assumptions in the context of identified market trends and market and customer segment sizing findings Positioning strategy Market and customer segmentation Problem statement/critical need Competitive differentiation Business and pricing models Partnership/channel strategies (define need to understand TAM & different levels, e.g. OEM) Review and discuss findings and implications with: Executive management Board of Directors All functional areas: marketing, sales, finance, engineering, operations Plan process and timeline for regular market updates Timing: quarterly and annual Coverage: market trends, current/potential/lost customers, competitors, partners Maintain and use list of best (closest and most accurate coverage) analyst sources as inputs to marketing communications strategy and analyst programs

©2002 Li z Arrington 12 APPENDIX - TAM Examples - SAM Examples - SOM Examples

©2002 Li z Arrington 13 TAM Example – Dense IA-32 Servers Challenge: Need to use widely available and detailed macro data to break down very large Intel Architecture (IA) server market into meaningful pieces Approach: Defined geographic rollout plan US only for years 1-3 International for years 4-5 Determined most relevant server characteristics and adjusted total shipment numbers accordingly Application = Internet server Form factor = Rack-dense (rack-optimized traditional and blade servers) Processor = 1 and 2-way processors Operating Systems supported = Linux for year 1, add Windows in year 2 Sourced and applied projections for IA server OS penetration & growth rates (discounting for upgrades and redeployments on existing HW) Estimated total available market for 5 years Source: MarketFocus

©2002 Li z Arrington 14 Source: MarketFocus TAM Example – Dense IA-32 Servers

©2002 Li z Arrington 15 SAM Example – Dense IA-32 Servers Challenge: Need to further refine segmentation assumptions for next generation product planning Approach: Identified functional applications (within Internet server market TAM) that are addressable by Linux and NT server farms Internet infrastructure Collaborative applications Application development environments Scientific and technical Estimated percentage of each application that companys solution could technically address (by year) Applied forecast growth rates for: Relevant applications by OS Relevant server sales Source: MarketFocus

©2002 Li z Arrington 16 Source: MarketFocus SAM Example – Dense IA-32 Servers

©2002 Li z Arrington 17 Source: MarketFocus SAM Example – Dense IA-32 Servers

©2002 Li z Arrington 18 SOM Example – Lab Automation SW Challenge: Need to calculate potential value of market that company plans to penetrate Approach: Identified potential target accounts that made up 80% of the SAM and built on first-hand knowledge of selected companies to estimate the number of labs per company for entire population Estimated the percentage of labs within a penetrated account that company will be able to address per year Defined criteria for account selection (type of company/risk profile, projected minimum budgets, spending on new services, geography) Projected the number of new accounts per year that company will have the internal resources to address Incorporated assumptions regarding recruitment of SI partners and their ability to develop new customers and expand business with existing customers Selected accounts for each year and applied company pricing formula to estimate the SOM Source: MarketFocus

©2002 Li z Arrington 19 Presenters Liz Arrington,Consultant Market Focus