™ Transforming the Cost Base: 2009 Update 13 November 2009 Finance and Strategy Practice Economic Analysis and Decision Support Group

™ Executive Summary ROAD MAP FOR THE PRESENTATION Performance of All Elite Cost Cutters (S&P & Global) Appendix A: Performance of S&P Elite Cost Cutters Appendix B: Performance of Industry Leading Cost Cutters Appendix C: Stylized Facts About Cost Behavior

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 3 EXECUTIVE SUMMARY From 1994 to 2004 most companies struggled to sustainable reduce costs (a trend that persists), but an elite set of cost cutters demonstrated the ability to achieve sustained reductions. Elite cost cutters did so by focusing efforts on improving supply chain efficiency and on reducing direct costs (COGS) rather than reducing SG&A expenses. The strategy of aggressive cost cutting followed by elite cost cutters may have run its course: I. Declining ability to take costs out the system: Despite the nearly 2% annual reduction in the cost-to-revenue ratio of elite cost cutters over the 1994 to 2004 period, the pace of their gross margin improvements has significantly slowed over the recent past. The elite cost cutters within the S&P have seen their COGS-to-Sales ratios increase, albeit slightly, over the last year. While elite cost cutters continued generating cost reductions by lowering SG&A to sales, the potential for sustained reductions here is very limited. This suggests a declining ability on the part of even elite cost cutters to take further cost out of the system. II. Focus on cost agility: While continuing cost reductions have slowed, elite cost cutters have managed to control the ratio of costs to sales even in recessionary environments. This suggests that elite cost cutters are more cost agile, quickly controlling their expenses as a percent of sales during both good and bad economic times. Our analysis confirms the following: S&P elite cost cutters exert tighter control over COGS than other companies do, particularly when sales rise. S&P elite cost cutters keep SG&A costs significantly more variable than other companies do. S&P elite cost cutters act quicker to adjust SG&A costs in reaction to changes in sales. Elite cost cutters are more conservative than other companies in increasing SG&A levels if past sales performance has been good and significantly more aggressive in reducing SG&A if past sales performance has been poor. III. World-class cost performance comes at the expense of growth: While elite cost cutters are rewarded in terms of total shareholder return and other return-based measures (such as return on investment, return on equity, etc.), they are at a significant disadvantage in terms of revenue growth, growing almost 3.5 percentage points slower than their non-elite peers over the period. The strategy of cost-cutting as a source of sustainable competitive advantage appears to have run its course. Moreover, aggressive cost management appears to limit companies’ ability to generate growth. We recommend that companies re-focus on seeking profitable growth, while maintaining cost agility.

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 4 SPOTLIGHT ON COGS Previous Board research found that although most companies struggled to cut costs, a set of elite companies successfully drove down costs by emphasizing COGS reductions rather than SG&A cuts. The average company struggled to achieve sustained reductions in costs over the period. Elite cost cutters drove down total expenses significantly more than other companies over the 1994 – 2004 period. Elite cost cutters achieved sustained cost reductions by doubling down on reducing COGS even while tolerating higher levels of SG&A relative to other companies. Total Expense* to Sales Ratio (1994 to 2004) SG&A to Sales Ratio ( ) Elite Cost Cutters N = 102 Other Companies N = 378 COGS to Sales Ratio ( ) * Total expense refers to the sum of COGS and SG&A.

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 5 COST CUTTING SLOWING DOWN EVEN AMONG ELITE COST CUTTERS Most companies still struggle to maintain cost discipline and even elite cost cutters are slowing down the rate of cost reductions Non-elite companies have seen their costs (as a percent of sales) increase during the 2004 to 2008 period. Elite cost cutters are still reducing over the 2004 to 2008, but at a much slower rate than they did in previous years. Total Expense* to Sales Ratio (1994 to 2008) Elite Cost Cutters N = 102 Other Companies N = 378 Elite cost cutters have significantly slowed the pace of cost reduction in recent years. * Total expense refers to the sum of COGS and SG&A.

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 6 DOWN TO BONE In recent years, elite cost cutters have focused more on reducing SG&A rather than COGS in order to control costs. S&P elite cost cutters have significantly slowed down their pace of COGS reduction in the last three years years relative to the period. Instead, they have tried to maintain cost discipline by steadily reducing the ratio of SG&A to sales in recent years. There appears to be limited potential for further cuts in COGS and SG&A by elite cost cutters. COGS to Sales Ratio for Elite Cost Cutters (1994 to 2008) SG&A to Sales Ratio for Elite Cost Cutters (1994 to 2008) Elite Cost Cutters N = 102 Other Companies N = 378 Elite cost cutters have significantly slowed the pace of COGS reduction in recent years relative to the period. Elite cost cutters have significantly reduced SG&A in recent years.

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved Year TSR**, Over the last ten years, the market has rewarded elite cost cutters with significantly higher TSR, despite their lower revenue growth rates relative to other companies. Elite cost cutters have almost 4.5 times higher shareholder return relative to other S&P companies. However, elite cost cutters have significantly lower revenue growth relative to other companies Revenue CAGR, T-Test for Differences in Means Result: S&P elite cost cutters have significantly higher TSR. T-Statistic: 4.62 P-value*: S&P Elite Cost CuttersN = 69 Other Companies N = 206 > * P-values of.1 or less represent statistically significant differences at the 90% threshold level of significance. T-Test for Differences in Means Result: Elite cost cutters have significantly lower revenue growth relative to others. T-Statistic: P-value*: < ** This analysis includes only S&P 500 companies as we could not obtain comparable TSR data for non-US companies. Elite Cost CuttersN = 102 Other Companies N = 378 HIGHER TSR, LOWER GROWTH

™ Executive Summary ROAD MAP FOR THE PRESENTATION Performance of All Elite Cost Cutters (S&P & Global) Appendix A: Performance of S&P Elite Cost Cutters Appendix B: Performance of Industry Leading Cost Cutters Appendix C: Stylized Facts About Cost Behavior

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 9 DEFINING ELITE COST CUTTERS Elite cost cutters are defined as companies with negative average annual growth of total expenses to sales for both the as well as the periods. Elite cost cutters are quite evenly spread across various industry sectors. Elite Cost Cutters N = 102 *Total Expense to Sales Ratio is defined as the sum of SG&A and COGS expressed a percent of net sales. Elite Cost Cutters Companies that experienced negative average annual growth of total expenses to sales over both the and the periods. Distribution of Elite Cost Cutters Distribution of Elite Cost Cutters (By Industry) N = 480

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 10 Total Expense to Sales Ratio, 1994 to 2008 Although elite cost cutters have consistently lowered costs, the pace of cost cutting has declined in recent years. Non-elite cost cutters have seen their costs increase steadily in recent years. Elite cost cutters have continued to lower costs, even during the recession. The difference between expense to sales ratios for elite and non-elite cost cutters is at an all time high. However, the pace of cost cutting has significantly declined over the last few years. Elite Cost Cutters N = 102 Other Companies N = 378 Elite Cost Cutters Defined as companies who saw negative average annual growth of expense to sales over both the and the periods. *Total Expense to Sales Ratio is defined as the sum of SG&A and COGS expressed a percent of net sales. A CONTINUING STRUGGLE

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 11 COGS to Sales Ratio, 1994 to 2008 Although elite cost cutters have consistently lowered costs relative to others, the pace of COGS reduction has has slowed down significantly in recent years. Non-elites experienced an increase in their COGS to sales ratio over the corresponding period, leaving the COGS gap between elite cost cutters and others at an all time high. However, the pace of COGS reduction by elite cost cutters declined significantly over the recent past. Elite Cost Cutters N = 102 Other Companies N = 378 Elite Cost Cutters Defined as companies who saw negative average annual growth of expense to sales over both the and the periods. *Total Expense to Sales Ratio is defined as the sum of SG&A and COGS expressed a percent of net sales. RUNNING OUT OF STEAM

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 12 SG&A to Sales Ratio, 1994 to 2008 Elite Cost Cutters have steadily reduced their SG&A to sales ratio over the last 5 year period. Other companies have seen their SG&A to sales ratios remain relatively constant over the past few years. The potential for further reductions in SG&A may be limited. Elite Cost Cutters N = 102 Other Companies N = 378 Elite Cost Cutters Defined as companies who saw negative average annual growth of expense to sales over both the and the periods. *Total Expense to Sales Ratio is defined as the sum of SG&A and COGS expressed a percent of net sales. DOUBLING DOWN ON SG&A

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 13 Although COGS tends to vary proportionately with sales for all companies, elite cost cutters variabilize SG&A significantly more than other companies do. In general, COGS tends to rise (fall) by 1% for every 1% increase (decrease) in sales. Elite cost cutters exert tighter control over COGS than other companies do when sales rise, increasing costs by.99% for every 1% increase in sales, whereas other companies COGS rise by 1.03% for a 1% increase in sales. However, elite cost cutters vary SG&A significantly more than other other companies do, especially if sales decline. Elite Cost Cutters reduce SG&A almost twice as much as other companies do when sales decline. THE IMPORTANCE OF COST AGILITY Cost of Goods SoldSelling, General, and Administrative Expense Percentage Increase in COGS for a 1% Increase in Sales Percentage Decrease in COGS for a 1% Decrease in Sales Percentage Increase in SG&A for a 1% Increase in Sales Percentage Decrease in SG&A for a 1% Decrease in Sales Elite Cost Cutters.99%.71% Other Companies 1.03%.99%.79%.37% * Estimated using time series regression analysis (the econometric specification of the regression model is presented in the appendix). The estimation was conducted using the feasible generalized least squares technique, which corrects for biases from heteroscedasticity as well as serial error correlation that arise from the cross-sectional time series nature of the data. Fixed effects were used to control for industry and company-specific influences on costs. Sensitivity* of COGS and SG&A to Changes in Sales Comparison of Elite Cost Cutters and Others** S&P Elite Cost Cutters N = 1092 Company Years Other S&P Companies N = 3269 Company Years ** Analysis conducted on sample of S&P 500 companies only. Non-elite companies display significant downward inflexibility in SG&A when sales decline.

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 14 Elite cost cutters are significantly more aggressive than other companies at varying SG&A levels if their sales have declined in previous years. In general, SG&A is more variable if there has been a sustained increase in sales than if there has been only a temporary increase in sales. Elite cost cutters do not vary SG&A as much as others if sales have increased in recent years. However, elite cost cutters have significantly more variable SG&A than others if sales have declined in recent years. DON’T OVERREACT TO SHORT-TERM TRENDS Percentage Change in SG&A for a 1% change in Sales after: Two periods of successive increases in sales Decrease in Sales followed by an increase Increase in sales followed by a decrease Two successive periods of sales decreases Elite Cost Cutters.75%.66%.57%.90% Other Companies.82%.75%.34 %.47% * Estimated using time series regression analysis (the econometric specification of the regression model is presented in the appendix). The estimation was conducted using the feasible generalized least squares technique, which corrects for biases from heteroscedasticity as well as serial error correlation that arise from the cross-sectional time series nature of the data. Fixed effects were used to control for industry and company-specific influences on costs. Sensitivity* of SG&A to Sales Conditional on Past Performance Comparison of Elite Cost Cutters and Others** S&P Elite Cost Cutters N = 1092 Company Years Other S&P Companies N = 3269 Company Years ** Analysis conducted on sample of S&P 500 companies only. Elite cost cutters are more aggressive than other companies at varying SG&A levels if there have been recent declines in sales. Elite cost cutters are almost twice as aggressive as others at varying SG&A levels after a sustained decline in sales.

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 15 Average ROI, Elite cost cutters generate a significantly higher return on investment and total shareholder returns relative to other companies. Elite cost cutters generate a return on investment that is three percentage points higher than other companies. The total share holder return for elite cost cutters is almost 4.5 times higher than that for other companies within the S&P. T-Test for Differences in Means Result: Elite cost cutters have significantly higher ROI. T-Statistic: 2.46 P-value*: Elite Cost CuttersN = 102 Other Companies N = 378 > * P-values of.1 or less represent statistically significant differences at the 90% threshold level of significance. 10-Year TSR**, T-Test for Differences in Means Result: S&P elite cost cutters have significantly higher TSR. T-Statistic: 4.62 P-value*: S&P EliteN = 69 Other Companies N = 206 > * P-values of.1 or less represent statistically significant differences at the 90% threshold level of significance. ** This analysis includes only S&P 500 companies as we could not obtain comparable TSR data for non-US companies. REAPING THE REWARDS

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 16 Average Return on Equity, ’94-’08 Elite cost cutters have higher return on equity but significantly lower revenue growth relative to other companies. Not surprisingly, elite cost cutters have more than a 5 percentage point advantage in terms of return on equity relative to other companies. However, elite cost cutters have significantly lower revenue growth compared to other companies. Revenue CAGR, ’94-’08 T-Test for Differences in Means Result: Elite cost cutters have significantly higher ROE relative to others. T-Statistic: 2.20 P-value*: T-Test for Differences in Means Result: Elite cost cutters have significantly lower revenue growth relative to others. T-Statistic: P-value*: Elite Cost CuttersN = 102 Other Companies N = 378 < > * P-values of.1 or less represent statistically significant differences at the 90% threshold level of significance. A MIXED BLESSING

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 17 APPENDIX

™ Executive Summary ROAD MAP FOR THE PRESENTATION Performance of All Elite Cost Cutters (S&P & Global) Appendix A: Performance of S&P Elite Cost Cutters Appendix B: Performance of Industry Leading Cost Cutters Appendix C: Stylized Facts About Cost Behavior

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 19 DEFINING S&P ELITE COST CUTTERS The Board also examined the behavior and performance of elite cost cutters within the S&P 500. S&P elite cost cutters are fairly evenly distributed across various industry sectors. S&P Elite Cost Cutters N = 69 *Total Expense to Sales Ratio is defined as the sum of SG&A and COGS expressed a percent of net sales. S&P Elite Cost Cutters S&P companies that experienced negative average annual growth of total expenses to sales over both the and the periods. Distribution of S&P Elite Cost Cutters Distribution of S&P Elite Cost Cutters (By Industry) S&P Companies N = 275

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 20 Total Expense to Sales Ratio, 1994 to 2008 (S&P 500 Companies Only) Although S&P 500 elite cost cutters significantly reduced costs, the pace of cost reductions has slowed significantly in recent years. Other S&P 500 companies witnessed an increase in their expense to sales ratios over the corresponding period, leaving the gap between S&P 500 companies and others at an all-time high. However, the pace of cost reductions by elite cost cutters has declined significantly relative to to period. S&P Non-Elite N = 206 S&P Elite N = 69 S&P Elite cost cutters have lowered their expense to sales ratios even during the current recession. S&P Elite Cost Cutters Defined as S&P companies who saw negative average annual growth of expense to sales over both the and the periods.

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 21 COGS to Sales Ratio, 1994 to 2008 (S&P 500 Companies Only) After a long period of consistent increase in gross margins, the rate of COGS- to-Sales reduction experienced by S&P 500 Elite Cost Cutters has declined in recent years and even shown signs of increase between 2007 and S&P 500 companies witnessed an increase in their COGS to sales ratio over the last five years. The long-term strategy of COGS reduction by S&P elites appears to be loosing momentum. S&P Non-Elite N = 206 S&P Elite N = 69 S&P Elite Cost Cutters Defined as S&P companies who saw negative average annual growth of expense to sales over both the and the periods.

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 22 SG&A to Sales Ratio, 1994 to 2008 (S&P 500 Companies Only) S&P 500 Elite Cost Cutters have slightly reduced their SG&A to sales ratio over the last 5 year period. Most S&P 500 companies have experienced an increase in their SG&A to sales ratios over the 2005 to 2008 period. Although in the past S&P elite cost cutters had higher levels of SG&A, they lowered their SG&A to sales ratio below other S&P companies in However, the potential for further SG&A reductions by the S&P elite cost cutters might be limited. S&P Elite Cost Cutters Defined as S&P companies who saw negative average annual growth of expense to sales over both the and the periods. S&P Non-Elite N = 206 S&P Elite N = 69

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 23 Average Return on Equity, S&P elite cost cutters have equivalent levels of return on equity and revenue growth relative to other S&P companies. Although S&P elite cost cutters generate somewhat higher return on equity, the difference between their ROE and that of other S&P companies is not statistically significant. While S&P elite cost cutters have experienced lower growth in revenue compared to other S&P peers, this difference is not statistically significant. T-Test for Differences in Means Result: S&P Elite cost cutters do not significantly differ from others in terms of ROE. T-Statistic: P-value*: S&P EliteN = 69 Other Companies N = 206 * P-values of.1 or less represent statistically significant differences at the 90% threshold level of significance. Revenue CAGR, T-Test for Differences in Means Result: S&P Elite cost cutters do not significantly differ from others in their revenue CAGR. T-Statistic: P-value*: ≈ ≈

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 24 Average ROI, Over the last ten years, the Wall Street has rewarded the S&P elite cost cutters with significantly higher TSR and return on investment relative to other S&P companies. S&P elite companies have more than a 3 percentage point advantage over other S&P companies in terms of return on investment. They have almost 4.5 times higher shareholder return relative to other S&P companies. 10-Year TSR, T-Test for Differences in Means Result: S&P elite cost cutters have significantly higher ROI. T-Statistic: 2.38 P-value*: T-Test for Differences in Means Result: S&P elite cost cutters have significantly higher TSR. T-Statistic: 4.62 P-value*: S&P EliteN = 69 Other Companies N = 206 > > * P-values of.1 or less represent statistically significant differences at the 90% threshold level of significance.

™ Executive Summary ROAD MAP FOR THE PRESENTATION Performance of All Elite Cost Cutters (S&P & Global) Appendix A: Performance of S&P Elite Cost Cutters Appendix B: Performance of Industry Leading Cost Cutters Appendix C: Stylized Facts About Cost Behavior

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 26 DEFINING AN INDUSTRY COST CUTTING LEADER Industry cost cutting leaders are defined as the companies whose cost grew at below-average levels relative to their industry during as well as Industry cost cutting leaders represent a variety of industry sectors. Distribution of Industry Cost Cutting Leaders N = 480 Distribution of Industry Cost Cutting Leaders By Industry Industry Cost Cutting Leaders N = 119 Industry Cost-Cutting Leaders Defined as companies that experienced below- industry average growth in expense to sales over the as well as the period.

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 27 COGS to Sales Ratio, 1994 to 2008 (Industry Cost Cutting Leaders vs Other) Industry cost cutting leaders have significantly lower COGS than other companies, but the pace of COGS reduction are slowed significantly. Most companies have experienced a steady increase in COGS over the last 5 years. Although industry cost cutting leaders continue to have much lower COGS to sales, they have significantly slowed the pace of COGS reduction over the last five years. Industry Cost-Cutting Leaders Defined as companies that experienced below- industry average growth in expense to sales over the as well as the period. Other Companies N = 361 Industry Cost Cutting Leaders N = 119

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 28 SG&A to Sales Ratio, 1994 to 2008 (Industry Cost Cutting Leaders vs Others) Industry cost cutting leaders and other companies have held SG&A levels relatively constant over the last few years. Industry cost cutting leaders have had consistently higher SG&A levels relative to other companies. However, their SG&A-to-Revenue showed signs of decline in the last five years. Most companies have held SG&A levels relatively constant in the last five years. Industry Cost-Cutting Leaders Defined as companies that experienced below- industry average growth in expense to sales over the as well as the period Other Companies N = 361 Industry Cost Cutting Leaders N = 119

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 29 Average Return on Equity, Industry cost cutting leaders have equivalent ROE but lower revenue growth relative to other companies. Industry cost cutting leaders and others are statistically indistinguishable in terms of return on equity. Industry cost cutting leaders generate significantly lower revenue growth relative to other companies. T-Test for Differences in Means Result: Industry cost cutting leaders do not significantly differ from others in terms of ROE. T-Statistic: 1.12 P-value*: * P-values of.1 or less represent statistically significant differences at the 90% threshold level of significance. Revenue CAGR, T-Test for Differences in Means Result: Industry cost cutting leaders have significantly lower revenue CAGR relative to others. T-Statistic: P-value*: < ≈ Industry Cost Cutting Leaders N = 119 Other Companies N = 361

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 30 Elite cost cutters generate significantly higher TSR but also significantly lower revenue growth relative to other companies Companies that minimize the growth or volatility of expenses to sales generally have higher ROI relative to other companies. However, elite cost cutters are also at a significant disadvantage relative to other companies in terms of revenue growth. DEFINITIONS Elite Cost Cutters refers to companies with negative average annual growth of expense to sales over both the and the periods. S&P Elite Cost Cutters refers to S&P 500 companies who saw negative average annual growth of expense to sales over both the and the periods. Industry Cost-Cutting Leaders are companies that experienced below- industry average growth in expense to sales over the as well as the period. Comparison of Elite Cost Managers By Financial Performance (all companies) Return on Equity Revenue CAGR Return on Investment TSR All Elite Cost Cutters Significantly higher than other companies Significantly lower than other companies Significantly higher than other companies N/A S&P 500 Elite Cost Cutters Statistically indistinguishable from other companies Significantly higher than other companies Industry Cost Cutting Leaders Statistically indistinguishable from other companies Significantly lower than other companies Significantly higher than other companies Financial Metric Definition Of Elite ** Statistically significant differences were assessed using a 95% threshold level of significance in a two-sample t-test.

™ Executive Summary ROAD MAP FOR THE PRESENTATION Performance of All Elite Cost Cutters (S&P & Global) Performance of S&P Elite Cost Cutters Performance of Industry Cost Cutting Leaders Appendix: Stylized Facts About Cost Behavior

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 32 MEASURING COST RESPONSIVENESS The Board used an econometric model of cost behavior to test for the responsiveness of costs to changes in the volume of activity. The regression equation helps estimate the responsiveness of costs to both increases as well as decreases in sales. The regression approach also controls for the effect of company- and industry-specific influences via fixed effects. The Econometric Model Explained * P-values of.1 or less represent statistically significant differences at the 90% threshold level of significance. Dependent Variable: Current-Year Growth in a company’s costs Fixed Effects to control for company- and industry-specific influences Current-Year Growth in a company’s sales Growth in a company’s sales in the previous period Magnitude of decrease in a company’s current period sales growth, if a decrease occurred, otherwise zero. Magnitude of decrease in a company’s previous period sales growth, if a decrease occurred, otherwise zero. Interpretation of Regression Coefficients β ‘s are the cost sensitivity coefficients associated with each variable on the right hand side of the regression equation. They represent the percentage change in the dependent variable (costs) as a result of a 1% change in the right hand side variables. D is a dummy variable that takes the value 1 if sales decreased in a particular year relative to the previous year, and 0 otherwise.

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 33 Although cost of goods sold (COGS) tends to vary proportionately with sales, S&P elite cost cutters exert tighter control over COGS than other companies do when sales rise. In general, COGS tends to rise (fall) by 1% for every 1% increase (decrease) in sales. S&P elite cost cutters exert tighter control over COGS than other companies do when sales rise ELITE COST CUTTERS: TIGHT CONTROL OVER COGS Sensitivity of COGS to Increase in Sales Sensitivity of COGS to a Decrease in Sales All S&P Companies 1.02 (p-value 0.00) 1.06 S&P Elite Cost Cutters.99 (p-value 0.00).99 Other S&P Companies1.03 (p-value 0.00).99 Econometric Model * P-values of.1 or less represent statistically significant differences at the 90% threshold level of significance. The estimation was conducted using the feasible generalized least squares technique, which corrects for biases from heteroscedasticity as well as serial error correlation typically arising from the cross-sectional time series nature of the data. Regression Estimates All S&P Companies N = 4361 Company Years S&P Elite Cost Cutters N = 1092 Company Years Other S&P Companies N = 3269 Company Years S&P elite cost cutters vary COGS less than proportionately to sales relative to other S&P companies when sales rise.

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 34 Elite cost cutters ‘variable- ize’ their SG&A costs more than other companies do. In general, SG&A costs increase more when sales rise than they decrease when sales fall. For the average company, SG&A costs increase by.78% for a 1% increase in sales but only fall by.46% for a 1% decrease in sales. This downward inflexibility in costs typically arises from fixity of costs as well as adjustment costs of reducing resource levels. However, Elite Cost Cutters vary their SG&A costs proportionately to the volume of sales so that costs change proportionately (.71%) in the direction of sales growth/decline. ELITE COST CUTTERS: ‘VARIABLE- IZING’ SG&A Sensitivity of SG&A to Increase in Sales Sensitivity of SG&A to a Decrease in Sales All S&P Companies.78 (p-value 0.00).46 S&P Elite Cost Cutters.71 (p-value 0.00).71 Other S&P Companies.79 (p-value 0.00).37 Econometric Model * P-values of.1 or less represent statistically significant differences at the 90% threshold level of significance. The estimation was conducted using the feasible generalized least squares technique, which corrects for biases from heteroscedasticity as well as serial error correlation typically arising from the cross-sectional time series nature of the data. Regression Estimates All S&P Companies N = 4361 Company Years S&P Elite Cost Cutters N = 1092 Company Years Other S&P Companies N = 3269 Company Years

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 35 Elite cost cutters do not carry over cost changes from previous years sales activity, and instead choose to fully adjust costs to reflect changes in sales in the current year itself. In general, SG&A costs respond to sales with a lag, rising.04% in the current year for a 1% increase in previous year’s sales. However, Elite cost cutters do not carry over the effect of past changes in sales on current year SG&A levels. In general, cost stickiness does not revert in future periods for non-elite companies (i.e., downward inflexibility of costs continues to persist). ELITE COST CUTTERS: ACTING DECISIVELY Sensitivity of SG&A to Increase in Previous Year Sales Reversion of Cost Stickiness All S&P Companies.04 (p-value 0.00) -.04 (p-value 0.00) S&P Elite Cost Cutters.02 (p-value 0.16) -.02 (p-value 0.34) Other S&P Companies.04 (p-value 0.002) -.05 (p-value 0.001) Econometric Model * P-values of.1 or less represent statistically significant differences at the 90% threshold level of significance. The estimation was conducted using the feasible generalized least squares technique, which corrects for biases from heteroscedasticity as well as serial error correlation typically arising from the cross-sectional time series nature of the data. Regression Estimates All S&P Companies N = 4361 Company Years S&P Elite Cost Cutters N = 1092 Company Years Other S&P Companies N = 3269 Company Years These estimates are statistically indistinguishable from 0, implying that the effect of past declines in sales do not carry over to current- year SG&A for elite cost cutters.

Economic Analysis and Decision Support Group © 2009 The Corporate Executive Board Company. All Rights Reserved. 36 Elite cost cutters are significantly more aggressive than other companies at varying SG&A levels if there if sales have declined in previous years. In general, SG&A is more variable if there has been a sustained increase in sales than if there has been only a temporary increase in sales (.81% as opposed to.73%). Elite cost cutters vary SG&A less than others (.66% as opposed to.75% for others) if the decline in sales is temporary and reversed in the following year. However, they vary SG&A more than other companies (.57% as compared to.34%) if there has been a sales decline in the past year. Further, elite cost cutters are significantly more likely to vary SG&A if there has been a sustained decrease in sales. ELITE COST CUTTERS: MANAGING COSTS CONSERVATIVELY After Two periods of successive increases in sales After Decrease in Sales followed by an increase After Increase in sales followed by a decrease After Two successive periods of sales decrease All S&P Companies.81 (p-value 0.00).73 (p-value 0.00).39 (p-value 0.00).63 (p-value 0.00) S&P Elite Cost Cutters.75 (p-value 0.00).66 (p-value 0.00).57 (p-value 0.00).90 (p-value 0.00) Other S&P Companies.82 (p-value 0.00).75 (p-value 0.00).34 (p-value 0.00).47 (p-value 0.00) Econometric Model * P-values of.1 or less represent statistically significant differences at the 90% threshold level of significance. The estimation was conducted using the feasible generalized least squares technique, which corrects for biases from heteroscedasticity as well as serial error correlation typically arising from the cross-sectional time series nature of the data. Sensitivity* of SG&A to Sales Conditional on Past Performance Comparison of Elite Cost Cutters and Others** All S&P Companies N = 4361 Company Years S&P Elite Cost Cutters N = 1092 Company Years Other S&P Companies N = 3269 Company Years The I’s represent dummy variables that take the value 1 for years where sales increased relative to the previous year and, zero otherwise. The D’s represent dummy variables that take the value 1 for years where sales decreased relative to the previous year and, zero otherwise. Elite cost cutters are almost twice as aggressive as other companies at varying SG&A after experiencing two successive periods of sales declines.

CORPORATE EXECUTIVE BOARD ™ Economic Analysis and Decision Support Group Randeep RathindranDirector Oleg Polishchuk Senior Director Anil Prahlad Managing Director EADS contact information: