1. NEKIA Strategy Discussion Confidential Tel: (802) 296.8200 Fax: (802) 296.8300 205 Billings Farm Rd. Suite 2D White River Junction, VT 05001 November 18, 2005

2. 2Confidential Some Departure Questions… What is strategy? How would you describe your core business? What are the critical trends at work in the markets you serve? Are you the market leader in your core business, or is one of your competitors? Should you care? How do you think about growth in your business? What characteristics define the perfect investment?

3. 3Confidential Agenda  Important Themes in Strategy Development  The Strategic Value of Market Leadership  A Growth Planning Framework  Questions & Open Discussion

4. 4Confidential Defining Strategy  Strategy is the allocation of scarce resources  Strategy is a proprietary set of actions that better serve customers than the competition to build lasting market advantage

5. 5Confidential 10 Ideas Chief Executives Use all the Time… 1.Businesses must be grown or sold 2.Surplus growth is a central objective 3.Customers always act in their perceived self-interests 4.Real prices fall against a constant unit of customer value 5.Market leaders hold the most potential for superior returns 6.A growing market begets competition 7.All strategic analysis includes the variable of competition 8.Investment in advantaged positions yields superior returns 9.Operational excellence is not the same as strategy 10.Many strategies “implode” from lack of internal consistency or poor execution

6. 6Confidential Agenda  Important Themes in Strategy Development  The Strategic Value of Market Leadership  A Growth Planning Framework  Questions & Open Discussion

7. 7Confidential A Question… What does the Educational Knowledge Market look like?

8. 8Confidential Understanding Market Structure - Important Segments - Market Size - Growth Rates - Competitor Positions

9. 9Confidential Market Definition  Same customers  Same cost structure  Different customers  Different cost structure One Business Separate Businesses Compete in both segments to take advantage of synergies Do not compete in both segments Depends on the degree of competitive advantage conferred by sharing  Shared customers and/or  Shared costs

10. 10Confidential The Importance of Business Definition Companies that define their business incorrectly make poor strategic decisions… CostsCompetitors  Incur unnecessary costs  Forgo opportunities to capture synergies  Do not transfer experience  Underinvest in important R&D initiatives  Overlook relevant competitive threats  Miscalculate “market share”  Set inappropriate performance targets  Overlook relevant capacity changes  Misjudge true cost position Customers  Neglect profitable customer segments  Over-invest in unprofitable customers  Forgo opportunities to capture synergies  Misjudge relevant market trends  Overlook relevant geographies

11. 11Confidential Market Segmentation Customer Product Technology Channel Geography

12. 12Confidential Another One 8%16%8% Total: $215MM Market Growth Rate, Two-Year CAGR: School Reform Market ’02-03

13. 13Confidential The Demand Curve 25% 50%75% 0% 100% School Reform Market, 2003

14. 14Confidential What They Tell Us… -Aggregate Market Size and Growth Characteristics -Segment Shares and Growth Rates -Competitor Scope and Share -Identities of Market Leaders -Clues about Competitor Strategies -Potential Candidates for Partnership/Acquisition -Occasionally, New Fields of Opportunity

15. 15Confidential Another Question… Why should you care about market share?

16. 16Confidential Another Question for You… Does Big Co. Lead its Market?

17. 17Confidential Relative Market Share Market Share quantitatively measures an organization’s position in its market Generally speaking, the higher the share, the better the position. The “Market Leader” has the highest share There are two primary ways to calculate… The most common is the least useful: Market Share = Revenue / Market Size (expressed as a % of total market) This first method is limited because it provides no insight into an organization’s share relative to its competitors. The second method solves that problem Relative Market Share = Revenues / Revenues of Most Important Competitor (expressed as a multiple, i.e., 1.0X, 0.6X, 3.4X, etc.) Often referred to as RMS For the market leader, the most important competitor is the 2 nd largest player. For all others, it is the market leader Thus, only one organization in a market has an RMS > 1.0 According to empirical studies across businesses, there is a strong positive correlation between RMS and margins Market leaders have the potential to earn the highest margins

18. 18Confidential But Why? The Experience Curve This relationship between relative share and profit potential is grounded in an idea called the experience curve The experience curve is an observed economic phenomenon which says that it is the nature of prices to decrease predictably as a function of cumulative production (accumulated experience) This effect can be observed repeatedly: in rapid growth or low growth businesses, in manufacturing and services, and across different value-added functions (production & marketing) The behavior of costs underlies this relationship Effect is driven by three major sources: scale, technology, and learning Competitors who have the most accumulated experience have the potential for the lowest costs, although poor management can obscure this reality Interestingly enough, market share leaders also command the highest prices Thus, a point of market share is worth more to a market leader than it is to any other competitor in the industry Market share, expressed in relative terms, determines long-term profitability Within a company, the relationship between profitability and a business’ competitive position is often dramatic

19. 19Confidential A Powerful Relationship RMS (Log Scale) Return on Sales (% of Sales)

20. 20Confidential The Sensitech Example U.S. Temperature Monitoring Market, 1998 Sensitech B C D C g.5g.8g

21. 21Confidential The Sensitech Example U.S. Temperature Monitoring Market, 2004 Sensitech D.5g.3g- E F

22. 22Confidential Relative Growth Design Team Growth 03-04 Whole School Reform Growth 03-04

23. 23Confidential “Mechanics” vs. “Dynamics” As we discussed, market leaders have the potential to earn the highest margins Assuming good management, if companies grow at identical rates their margins will maintain constant relationship with one another Yet, this rarely happens in nature. In reality, companies grow at different rates -Companies fail to meet the performance standards they require in new products because they willingly over-invest in weak competitive positions -In so doing, the companies under-invest in advantaged positions When competitors grow at different rates, their market shares and cost positions change -Share declines lead to lower margins -Share increases lead to expanding margins In the long run, profitability changes are functions of relative growth

24. 24Confidential Agenda  Important Themes in Strategy Development  The Strategic Value of Market Leadership  A Growth Planning Framework  Questions & Open Discussion

25. 25Confidential A Question… How do you systematically look for growth?

26. 26Confidential The Paradox of Leadership… Each point of market share is worth more to a leader than a follower Scale and experience curve economics Price premium Reinvestment potential The better your core business is performing the more likely there is potential for both top and bottom line improvement

27. 27Confidential The Starting Point… Your Core Business CORE

28. 28Confidential Adjacencies Growth Opportunities That… Reinforce or defend the core business Leverage core business capabilities and assets Add value to customers in the core business Provide potential for leadership economics

29. 29Confidential Developing New Opportunities CORE Technology Channel GeographyProduct / service Capability Customer / customer segment Backward integration Forward integration Local Global expansion New-to-world New-to- company DirectIndirect New segments Microsegmentation of current segments Leverage business processes Knowledge management Process and systems Innovation

30. 30Confidential The Further from the Core, The Lower the Odds Unrelated diversification (<1% success) 3 steps (7%) 2 steps (26%) 1 step (38%) Core

31. 31Confidential So, how do you measure economic distance from the core business?

32. 32Confidential Back to Business Definition…

33. 33Confidential Odds of Success Vary by Vector… 27% average Source: GE Equity Forward / Backward Integration New Customer Segment New Products & Services

34. 34Confidential Opportunity Assessment HighLow Attractiveness Relatedness Low High

35. 35Confidential The Success Loop Generate High Customer Satisfaction Invest in Superior Products Acquire New Customers Provide Quality Support Sustain High Customer Retention Financial Surplus Expand Organizational Resources

36. 36Confidential Agenda  Important Themes in Strategy Development  The Strategic Value of Market Leadership  A Growth Planning Framework  Questions & Open Discussion

37. 37Confidential Do these ideas relate to your business?

38. 38Confidential Magritte’s Caution…

39. 39Confidential End of Document

40. 40Confidential Blank Chart