Competitive Advantage from the Bottom Up

Transcription

1 Competitive Advantage from the Bottom Up by Daniel Smith Most discussions of competitive advantage are presented from a bird's eye perspective. If you are a board member, or an industry analyst, or if you are simply looking for a good stock to buy, the big picture approach makes sense. Let's look at a typical discussion. Put this white paper aside, and link to The discussion is only a page or so long, yet it is quite good terse and to the point. Hopefully you just read it. Over the years I have directed many students to it and to pieces like it. The students have then turned to me and said, "I don't get it. How do I get a competitive advantage in Capstone?" And my response is usually, "Your Capstone company is no different than any other company. You use the same tactics." I would then show them the tactics and they would say, "Oh. So that's what a competitive advantage is." This white paper attempts to do in print what I usually do in the breakout room. It takes the bottom up approach to competitive advantage. We will use a Capstone Courier that was taken from a previous class chosen at random. (Reference to the school and students have been removed, but it was at one point a live class with six teams in Round 3.) You will find the Courier at the bottom of this document. I recommend that you print it or open up a second window in Word so that you can refer it as we look for competitive advantages. What is a competitive advantage? Simply put, Competitor A offers more of something that the customer wants than Competitor B. Turn to page 7, the High End segment page. Looking at the Buying Criteria, the customer's top priority is Positioning. On December 31, 2007 the ideal positioning was at Performance 11.6 and Size 8.4. Looking at the Perceptual Map or at the table at the bottom of page, the best positioning was offered by Adam. We could say that on the day this report was printed, Adam has a small competitive advantage over Cid in positioning, and a significant advantage over Dixie, with Echo somewhere in between. When looked at this way, identifying a competitive advantage is easy. You simply run through everything a customer could care about and ask, "How does my product compare with its competitors?" Let's prioritize the list of things a customer cares about in the High End. 1. Delivery. We tend to take this for granted, but it is the most important thing a customer cares about. Without delivery, other considerations are moot. Looking at the table at the bottom of the page, notice that every product stocked out. In the Statistics box at the top of the page, over 400 thousand units of demand could not be met. The stock out produced big winners and losers, as highlighted in the "Market Share Actual vs. Potential" chart. Bid, a terrible High End product (actually repositioned as a Traditional product) was the number 3 seller. Bid deserved 3% share and captured 19%. Fortunes were left on the table by Adam and Cid. 2. Satisfying the rough cut criteria. "Rough cuts" set an absolute limit on what a customer can buy. They define segments in any industry. In Capstone, the High End segment's rough cuts are: a. The product must fall within the outer segment circle on the perceptual map. b. The reliability must be above hours MTBF (5000 hours below the expected range of to 25000). c. The price must be within $4.99 of the expected range, and that applies above or below the range. In Round 3 the High End price rough cuts were at $23.51 and $ In this example, the secret of Bid's success is that it passes all of the rough cut criteria, and desperate customers are willing to buy anything that meets the minimums.

2 3. The "Product" design. Recall "the 4-P's" Product, Price, Promo, and Place. In Capstone the product design is taken from Positioning, Age, and Reliability. Earlier we looked at Positioning, but similar observations apply to Age and Reliability. Looking at the table at the bottom of page 7, Cid has a slight Age advantage over Adam, and an important one over Echo. However, all are vulnerable to a new product, since the perfect age is 0.0. Similarly, Adam has a reliability advantage over Cid and Echo, which in turn have an advantage over Dixie. 4. Price. Be careful here. From a customer's viewpoint, a lower price offers an advantage. However, price slips into something we will consider below, "sustainable competitive advantage". As price goes down, margins go down. Obviously negative margins cannot be sustained, and even small margins will be avoided. On the other hand, the customer is oblivious to your margins, seeing only the price. In the example on page 7, Echo attempts to overcome a bad design with a $4 price cut. If we compare Echo with Dixie, a similar bad design, we can get some sense of the price cut's impact. Looking at the Market Share chart, we might conclude that Echo's price cut increased our share about 3%. Was it worth it? Probably not, because Echo missed $4 on every unit it would have sold at $ Promotion. Customers want to know about your product. Looking at the table at the bottom of page 6, Adam has 62% awareness versus Echo's 46%. If all other factors were identical, Adam would outsell Echo simply because more customers know about it. 6. Place. Customers want to be able to find your product and work easily with your company. Capstone evaluates this in the Accessibility chart at the top of page 7. Chester, with accessibility of 70%, has a clear advantage over other competitors, including Andrews, its closest competitor at 56%. 7. Salesmanship. Customers want human interaction. We observe that given two identical competing products, if one has a salesman, and the other does not, chances are the salesman will win the sale. In the reports this will show up in the sales budget at the bottom of page 7. Capstone assumes that the bigger your Sales budget, the more sales force time you are allocating to the product. Cid, with a budget of $1593 will have a slight advantage over Adam and a larger advantage over Echo. 8. Credit terms. Customers want credit terms. A company demanding cash payment will see 60% of the demand of a company offering 90 day terms. To see if any company is offering better terms than another, turn to page 3 of the Capstone Courier. Divide Accounts Receivable by Sales at each company, and multiply by 365. Chester has an advantage, with a 60 day credit policy versus Andrews at 30 days. How would you get a competitive advantage in any of these 8 categories? Here is a list of tactics: 1. Delivery. An advantage here derives from good forecasting and production scheduling. In this case, Chester and Andrews had the production capacity, but failed to forecast their demand. This cost Andrews 8% of the market, and Chester a whopping 12%. Consider, 12% of a 4 million unit market is 481 thousand units. Chester had already paid for its fixed costs, even its interest costs. It was making Cid for $25.65 and selling it for $38.49, a margin of $ Multiply by 481 thousand units and we discover a total missed opportunity of $6.2 million. After tax profits at Chester should have been $4 million higher. 2. Rough cuts. The advantage here comes from recognizing segment boundaries and avoiding mistakes. a. Consider places where segments overlap. Sometimes a product can pick up sales from two segments. For example, bring up page 11, the Perceptual Map, and consider Bid. Although clearly a Traditional product, Baldwin hedged by offering a product that could satisfy a High End customer in a pinch. We could debate whether this was a good idea or not, (although it did pay off) but the underlying issue addresses whether segment boundaries are "strong" or "weak". For example, the price boundary between Traditional and High is strong, but between Traditional and Low it is much weaker. A team could develop an advantage based upon capturing incremental sales from an overlapping segment.

3 b. Recognizing potential mistakes confers two benefits. First, you avoid the mistake. Second, you consider ways to take advantage of a competitor's mistake for example, by choosing to carry a little extra inventory just in case your competitors stock out. In the High End segment Capstone teams often make rough cut mistakes around pricing and positioning. The price range falls $.50 each round. If you are priced at the top of range and forget to reduce your price $.50 each round, 10% of your demand bleeds away. Similarly, teams occasionally offer too much positioning, placing their product in the rough cut ahead of the segment. This is especially true during new product introductions. 3. Product design. Simply put, make every effort to give the customer what they want. If their top priority is positioning, give it to them. Of course, there is always a downside. It costs money, either directly in the R&D budget or indirectly in material and labor costs to give the customer a perfect design. 4. Price. First cut your material and labor costs. After the savings have materialized, then cut your price. a. To cut your material costs, place the product in the trailing part of the segment or reduce the MTBF specification. Notice that this is in direct conflict with what the customer wants (except in the Low End), but if the customer prefers price to the design, you could argue the customer is willing to sacrifice design. b. To cut your labor costs, automate the production line. As always there is a trade-off. When you automate, it becomes increasingly difficult to reposition products, an important liability in the high technology segments. c. You may also have opportunities to reduce the cost of goods via HR and TOM initiatives. 5. Promotion. Spend money on Promotion beyond what is necessary to replace lost awareness. It is possible to reach 100% awareness by spending heavily for several years. 6. Place. Spend money on the Sales budget to drive up accessibility, and place a second product in the segment. To reach 100% accessibility you will need two products in the segment. 7. Salesmanship. Spend more money on the Sales budget. This can be useful to move excess inventory. 8. Credit terms. Offer better terms. The downside is that it is expensive to give customers a loan. You must either borrow money to extend the loan, or tie up working capital that could be put to use in an income producing asset. What is a sustainable competitive advantage? Next we should consider the terms "sustained" and "sustainable" competitive advantage. They ask the question, "If we do this tactic to gain a competitive advantage, how long can we keep the advantage?" As a child, chances are you experienced an Easter egg hunt. Let's use the hunt to make the distinctions about competitive advantage clear. A group of children are lined up at the starting line of the Easter Egg hunt. In front of them is a playing field scattered with eggs. There are three groups of children small (ages 2 to 4), young (5 to 7), and older (8+). The goal is to grab the most eggs and put them into a basket. An excited two year old boy jumps the gun and toddles onto the field. The child's parents snatch the boy back to the starting line. During the time the child was on the field, he had a competitive advantage, but the advantage could not be sustained. He might even have secretly snatched an egg, but so far as the future is concerned, he no longer has any advantage over other children. His advantage was temporary, albeit real while it lasted. Business examples of this sort of temporary competitive advantage include a price cut, a promotional event like a sale, or simply telling the sales force to push a particular product this month. The key characteristic is that the effect is temporary but real while it lasts.

4 The officials signal that all the small children ages 2 to 4 can begin the hunt. They rush out onto the field and begin picking up eggs. They have a sustained advantage over older children. They are further onto the field, and they have a collection of eggs. A sustained advantage does have a memory. It confers some of its benefits into the future. Think of it as a head start. At a minimum, the small children enjoy an advantage while their competitors are off the field, plus the time it will take for competitors to catch up. Business examples of this sort of "sustained" competitive advantage include an advertising campaign, a new distribution center, a product update, or even a patent. The key characteristics are that the effect has both short term and long term components. The short term component is the temporary advantage described above. The long term component recognizes that it will take time for competitors to recognize and match your advantage. During the temporary period and the catch-up period you have sustained advantage. The officials signal that the 5 to 7 year old children can begin the hunt. They quickly overtake the small children and move further out onto the field. The small children's sustained advantage remains relative to the 8+ year olds, but it has evaporated relative to the 5 to 7 year olds. Further, the 5 to 7 year olds have a sustainable competitive advantage relative to the small children. Once ahead of the little ones, the little ones can never catch up. The gap keeps widening. Business examples are more difficult to find, which is why they are so prized. In general tactics fall into two camps erect barriers to entry, or find something that is a perpetual marathon where competitors cannot ever catch up. For example, a patent would erect a barrier to entry, making the "temporary" advantage quite long. 100% customer awareness or accessibility make it expensive for new competitors to enter the market. Riding a wave change in technology (electronics, software, nanotechnology) would offer a marathon. Finally the officials release the 8+ year olds. They quickly overtake the little ones, then the 5 to 7 year olds. The situation is now as follows. The little ones have no advantage in the future, and their parents collect them. The 5 to 7 year olds have a sustainable competitive advantage over the little ones. They are loath to give up, but they get few of the remaining eggs. The older children have a sustainable competitive advantage over both groups. At the end of the egg hunt, only the older children remain on the field. Business examples are easy to find in the historical record. Any company that finds a sustainable competitive advantage survives and prospers. Those that do not fail and exit the stage. It follows that all companies keep a sharp eye out for sustainable competitive advantages Competitive advantage in Capstone Now let's look at a list of tactics in Capstone and ask the question, "Does this tactic offer a temporary, sustained, or sustainable competitive advantage?" 1. We increase our promotion budget. This buys us increased awareness in the future. It presents a sustained competitive advantage. However, our competitors could catch up, so it is not a sustainable competitive advantage. The best we can hope for is that we reach 100% awareness. This might present a weak barrier to entry to new potential competitors, who would think, "It will take several years to catch them in awareness." 2. We increase our sales budget. This buys us increased accessibility. The arguments are much the same as with promotion. We have a sustained advantage, but at best we can achieve a weak barrier to entry. 3. We improve our product designs. Similar reasoning, similar result. 4. We do numbers 1, 2, and 3 all at once. Or put another way, we differentiate our product. This approaches a sustainable competitive advantage, in that it will dissuade all but the most determined competitors. Also notice that all of the elements of branding are in place except one, a barrier to exit. In branding we hope that customers will also experience some exit cost, even if it is only that they are comfortable and familiar with our product. 5. We cut the price without addressing our costs. This offers a temporary advantage, which might make sense if we have excess inventory, but is not sustainable over the long haul. 6. We increase automation. This confers a sustained advantage, and works much the same as points #1, #2, or #3. The barrier to entry is financial instead of time, so with deep pockets a competitor can overcome the barrier quickly. On the other hand, only serious competitors will take the step. 7. We add a new product in the segment, either by invention or repositioning. This confers a sustained advantage in the segment, although our two products cannibalize each other somewhat. However, the potential for sustainable advantage is also here. Try this thought experiment. Starting

5 with four competitors, consider what happens when one adds a second product. Then when a second competitor adds a product. As each product is added, the remaining competitors are less and less motivated to add another product. To gain a sustainable advantage, we endeavor to have one more product than our nearest competitor. The cost is that with every product, we further increase our SG&A expenditures within the segment. 8. We offer better credit terms. At best this is a sustained advantage, because it is easily matched by competitors. Competitive advantage and other stakeholders Competitive advantage applies to different types of stakeholder as well. Normally the term applies to customer relationships, but it is easy to see that bankers, stockholders, bondholders, and vendors have their own list of desirable features in a company. This is especially relevant in raising capital. More capital means more assets, and as a generalization, a large asset base confers an advantage over a small asset base. In the Courier, turn to Page 3. In the Balance Sheet Survey, scan across the balance sheets looking at two numbers Plant and Equipment, and Total Assets. Knowing nothing else about the companies, who would you predict would have the strongest competitive advantages going into the future? I would be interested in Ferris. More simply, suppose you saw that Andrews had twice the assets of Baldwin. Assuming equal management skill, Andrews has a clear advantage. Their assets would translate to more products, higher automation, better credit terms, etc. When considering competitive advantage, put customers first, but close on their heels put the capital markets. If you can get more highly productive assets on the playing field than your competitors, chances are you will overwhelm the competition. The big picture on competitive advantage. There is a relationship between your success with customers and your access to capital, and it cuts in both directions. Succeed with customers, and your profits will be good, Success with customers will make it easier to attract capital More capital leads to more assets More assets means you can serve customers even better. A virtuous circle, which in the end is the competitive advantage that observers want to see in action. ASSIGNMENT Using the Capstone Courier attached to this document, answer the following questions: 1. Looking at page 4, does any company have a competitive advantage in the Low End segment next round? If so, why? What could they do? (Tip. What do Low End customers want? Who is in a position to give that to them?) 2. Looking at page 4, Andrew's Able product is clearly better than Baldwin's Baker product, but in the Market Share Actual vs. Potential chart, Baldwin had potential demand of 38% while Andrews has only 16%. What is the secret of Baldwin's competitive advantage? What should Baldwin do next? What should Andrews do? 3. In an unusual lawn ceremony involving hari kari knives, the Andrews team's Acre product manager has atoned for his mistakes. (See page 6.) What did the Acre product manager do right to create a competitive advantage? What did he do wrong that resulted in his demise? 4. Pull out your crystal ball and turn to page 8. How many competitors will there be in the segment in three or four years? What can Ferris do to encourage this outcome?

6 5. Turn to page 3. Looking at the SGA line in the income statement, which competitor is most likely pursuing competitive advantage through differentiation? 6. Turn to page 4. Which competitor should worry Baldwin in the Traditional segment? Why?

7 Round 3, 12/31/2007 For Industry : C9411 Cheap at any price Andrews Bonus Baldwin Bonus Chester Bonus Digby Bonus Erie Bonus Ferris Bonus Andrews Baldwin Chester Digby Erie Ferris ROS 4.8% 3.4% 7.1% 7.7% 3.7% 12.0% Turnover ROA 6.4% 4.7% 7.9% 8.8% 4.1% 12.2% Leverage ROE 11.0% 8.5% 13.8% 14.1% 6.7% 23.4% Emergency Loan $0 $0 $0 $0 $0 $0 Sales $149,810,766 $157,498,347 $139,664,298 $138,036,281 $120,683,129 $134,132,686 EBIT $16,374,419 $13,883,245 $20,588,244 $21,630,333 $11,742,507 $32,463,326 Profits $7,210,223 $5,355,952 $9,962,354 $10,638,386 $4,518,772 $16,124,338 Cumulative Profit $21,962,351 $19,814,622 $28,954,549 $32,893,153 $17,609,434 $23,824,174 SG&A % Sales 9.7% 8.3% 10.3% 10.6% 8.8% 12.4% Contrib. Margin % 30.3% 23.0% 30.9% 33.8% 27.0% 44.4% Percent of Sales Andrews Baldwin Chester D VarCosts D Depr D SGA D Other Profit Digby Erie Ferris 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Page 1

8 CAPSTONE COURIER C9411 Round 3, 12/31/2007 STOCK MARKET SUMMARY Company Close Change Shares Market Cap ($M) Book Value EPS Dividend Yield PIE Andrews $39.98 $2.86 2,000,000 $80 $32.77 $3.61 $ % 11.1 Baldwin $39.04 $4.56 2,055,962 $80 $30.83 $2.61 $ % 15.0 Chester $46.46 $3.66 2,006,236 $93 $36.08 $4.97 $ % 9.4 Digby $49.43 $3.11 2,006,272 $99 $37.71 $5.30 $ % 9.3 Erie $37.68 $5.74 2,313,069 $87 $29.27 $1.95 $ % 19.3 Ferris $49.89 $ ,049,890 $102 $33.55 $7 87 $ % 6.3 $60 Closing Stock price I$50....,: - -Andrews $40 _ -i-baldwin Tr' Chester $20 $10 -NE-Erie 1- --Ferris BOND MARKET SUMMARY Company Series# Face Yield Close S&P Andrews $10,883, % $ BB $20,750, % $ BB $7,100, % $96.96 BB Baldwin $13,833, % $ BB $20,750, % $ BB` $12, % $95.48 BB, $2,500, % $95.69 BB $5,000, % $96.00 BB' Chester $11,370, % $ BB $20,750, % $ BB $50, % $96.96 BB, $5,000, % $ BB Digby $13,833, % $ $20,750, % $ Erie $13,833, % $ BBB $20,750, % $ BBB Ferris $11,333, % $ $20,750, % $ B $22,000, % $94.04 B $3,000, % $ B Page 2

9 CAPSTONE COURIER C9411 Round 3, 12/31/2007 Cash Flow Statement Survey Andrews Baldwin Chester Digby Erie Ferris Cash flows from operating activities Net Income (Loss) $7,210 $5,356 $9,962 $10,638 $4,519 $16,124 Adjustment for non-cash items Depreciation $9,455 $8,293 $8,137 $9,199 $8,440 $10,427 Extraordinary gains/losses/writeoffs $50 $0 $38 $0 $0 ($2) Changes in current assets and liabilities Accounts payable $2,306 $5,052 $4,481 $1,729 $1,387 $2,465 Inventory $0 $8,187 ($5,026) ($9,535) ($6,237) ($2,091) Accounts receivable ($97) ($4,718) $506 ($244) ($488) ($2,503) Net cash from operations $18,924 $22,170 $18,098 $11,788 $7,621 $24,421 Cash flows from investing activities Plant improvements (net) ($15,000) ($10,600) ($6,500) ($8,520) ($12,800) ($5,188) Cash flows from financing activities Dividends paid $0 $0 ($301) ($381) ($3,470) ($205) Sales of common stock $0 $1,500 $0 $40 $10,000 $0 Purchase of common stock $0 $0 $0 $0 $0 $0 Cash from long term debt issued $0 $5,000 $0 $0 $0 $0 Retirment of long term debt ($3,000) $0 ($2,500) $0 $0 ($2,500) Change in current debt ($5,407) ($2,006) ($6,917) ($4,167) ($6,917) ($6,917) Net cash from financing activities ($8,407) $4,494 ($9,718) ($4,508) ($386) ($9,622) Net change in cash position ($4,483) $16,064 $1,880 ($1,240) ($5,566) $9,611 Closing cash position $21,192 $38,982 $36,123 $22,383 $20,698 $19,388 Balance Sheet Survey Andrews Baldwin Chester Digby Erie Ferris Cash $21,192 $38,982 $36,123 $22,383 $20,698 $19,388 Accounts Receivable $12,313 $12,945 $22,959 $13,993 $9,919 $16,537 Inventory $215 $6,749 $9,535 $14,619 $2,091 Total Current Assets $33,505 $52,142 $65,831 $45,910 $45,236 $38,015 Plant and equipment $143,330 $124,400 $122,050 $137,980 $126,600 $156,400 Accumulated Depreciation ($63.983) ($61,779) ($61,769) ($62,695) ($61,926) ($62,272) Total Fixed Assets $79,347 $62,621 $60,281 $75,285 $64,674 $94,128 Total Assets $112,852 $114,763 $126,111 $121,196 $109,910 $132,143 Accounts Payable $8,582 $9,291 $16,563 $8,198 $7,613 $6,277 Current Debt $0 $0 $0 $2,750 $0 $0 Long Term Debt $38,734 $42,095 $37,171 $34,583 $34,583 $57,083 Total Liabilities $47,316 $51,386 $53,734 $45,531 $42,196 $63,360 Common Stock $18,276 $20,276 $18,526 $18,516 $28,276 $20,276 Retained Earnings $47,260 $43,100 $53,851 $57,148 $39,438 $48,507 Total Equity $65,536 $63,376 $72,377 $75,665 $67,714 $68,783 Total Liabilities & Owner's Equity $112,852 $114,763 $126,111 $121,196 $109,910 $132,143 Income Statement Survey Andrews Baldwin Chester Digby Erie Ferris Sales $149,811 $157,498 $139,664 $138,036 $120,683 $134,133 Variable Costs (Labor, Material, Carry) $104,415 $121,254 $96,543 $91,350 $88,142 $74,525 Depreciation $9,455 $8,293 $8,137 $9,199 $8,440 $10,427 SG&A (R&D, Promo, Sales, Admin) $14,471 $13,143 $14,321 $14,573 $10,659 $16,683 Other (Fees, Write Offs, TOM, Bonus) $5,095 $925 $75 $1,285 $1,700 $35 EBIT $16,374 $13,883 $20,588 $21,630 $11,743 $32,463 Interest (Short term, Long term) $5,032 $5,458 $4,917 $4,895 $4,634 $7,073 Taxes $3,970 $2,949 $5,485 $5,857 $2,488 $8,887 Profit Sharing $162 $120 $224 $239 $102 $380 Net Profit $7,210 $5,356 $9,962 $10,638 $4,519 $16,124 Page 3

10 CAPSTONE COURIER C9411 Round 3, 12/31/ ,000 Capacity vs. Production 3,000 4,000 5,000 6,000 El Capac Prod 7,000 Andrews Baldwin Chester Digby Erie Ferris Name Able Acre Adam Aft Agape Na Baker Bead Bid Bold Buddy Cake Cedar Cid Coat Cure Daze Dell Dixie Dot Dune Eat Ebb Echo Edge Egg Fast Feat Foam Fume Production Information Primary Units Units in Revision Age Pfmn Size MTBF Segment Sold Inventory Date Dec.31 Coord Coord Price Auto Material 2nd Shift Labor Contr mation Capac- Plant Cost Cost Marg. & Over- Next ity Next Utiliz. time Round Round Trad 1, May $25.99 $10.68 $ % 0% 5.0 2,000 99% Low 1, May $18.00 $5.71 $ % 0% 5.0 1,700 99% High Aug $38.50 $16.20 $ % 0% 3.0 1,100 99% Pfmn Jul $34.00 $15.23 $ % 6% % Size Jun $33.25 $13.09 $ % 0% % $0.00 $0.00 $0.00 0% 0% % Trad 1, Aug $27.00 $10.50 $ % 0% 4.0 1,800 77% Low 2, Aug $19.00 $6.68 $ % 29% 5.2 1, % High 1, Feb $29.99 $12.15 $ % 33% 3.0 1, % Trad Jul $26.99 $12.38 $ % 33% % Trad Sep $25.99 $10.99 $ % 17% % Trad Aug $27.99 $9.19 $ % 0% 4.5 1,800 64% Low 1, Jan $22.00 $5.49 $ % 41% 5.5 1, % High Sep $38.49 $15.44 $ % 0% % Pfmn Aug $33.49 $15.07 $ % 20% % Size Jul $33.49 $13.17 $ % 25% % Trad 1, Sep $27.99 $10.14 $ % 15% 5.3 2, % Low 1, Aug $19.75 $6.59 $ % 11% 6.0 1, % High May $38.99 $14.16 $ % 3% % Pfmn Apr $34.00 $14.66 $ % 12% % Size Jun $33.99 $11.92 $ % 3% % Trad 1, Mar $26.00 $9.85 $ % 0% 5.0 1,800 66% Low 2, Oct $19.99 $6.33 $ % 79% 6.0 1, % High Jul $34.49 $15.30 $ % 0% % Pfmn Feb $32.00 $13.74 $ % 0% % Size Jun $31.00 $12.60 $ % 0% % Trad 1, Jul $24.70 $8.57 $ % 0% 7.0 1,800 91% Low 2, Aug $18.30 $5.08 $ % 98% 9.0 1, % Pfmn Jun $33.49 $16.30 $ % 27% % Size Oct $33.49 $13.79 $ % 11% % Page 4

11 Traditional CAPSTONE COURIER C9411 Round 3, 12/31/2007 Statistics Total Industry Unit Demand Actual Industry Unit Sales Segment % of Total Industry Growth Rate 9,619 t 9, % 92% Accessibility Customer Buying Criteria 1. Age Expectations Ideal Age = 2.0 Importance 47% 2. Price $ % 3. Positioning Pfmn 7.1 Size % 4. Reliability MTBF % a N Cl, Perceptual Map nnhn - - n nnhnnnnnnn nnn nn ~~-~~ n~nnnnnnnnn 15 nnnnnnnn 14 nnn~ Mrl9}!fO nnnnnnnn firMIE nnn ~V~~~.nnnnnnnnn 10 nnn `iinnnnnnnnnn 9 nnhnnnnnnnnnnnnnnn 6 nnn=hnnhnnnnnnnn~ 5 Hn Hnnnn_nnnnnnn 4 nnnnnnhn nnnnnnnn n~~nnnn~~ nnnnnnnn nnnnnnhhn~nnnnnn 3 2 o Performance Market Share Actual vs. Potential q Actual II Potential 40% % 30% - 25% 20% 15% - -- to% Ii 5%- 0 % i - -T-... _ Andrews Baldwin Chester Digby Erie Ferris Name Market Units Sold Revision Stock Pfmn Size Share to Seg Date Out Coord Coord Top Products In Segment List Price MTBF Age Promo Sales Customer Dec.31 Budget Budget Awareness December Customer Survey 45 Able 17% 1,638 6-May-07 YES $ $1,150 $1,594 65% Daze 16% 1,530 4-Sep $ $1,100 $1,520 63% 39 Baker 14% 1, Aug-07 YES $ $1,200 $1,191 64% 41 Fast 14% 1, Jul $ $1,200 $2,200 66% 33 Eat 12% 1, Mar $ $1,075 $953 45% 24 Cake 9% Aug $ $550 $1,019 31% 23 Bold 7% Jul-07 YES $ $250 $596 17% 23 Buddy 6% Sep-07 YES $ $500 $596 17% 25 Bid 5% Feb-07 YES $ $1,350 $794 42% 7 Bead 0% 6 6-Aug $ $1,250 $794 29% 0 Egg 0% 4 18-Jun-07 YES $ $660 $675 14% 0 Page 5

12 CAPSTONE COURIER C9411 Round 3, 12/31/2007 Low End 1.Price 2.Age 3.Positioning 4.Reliability Statistics Total Industry Unit Demand 12,488 Actual Industry Unit Sales 12,488 Segment % of Total Industry 38.2% Growth Rate 11.7% Customer Buying Criteria Expectations $ Ideal Age = 7.0 Pfmn 3.2 Size16.8 MTBF importance 53% 24% 16% 7% Andrews Accessibility i Baldwin I Chester f ) Digby I 1 i Erie! Ferris,~ ~. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Name Perceptual Map _ 15,V~,~ ii `~T1 I1 N mil:, ~l~ n ~ aaa n ~ 8 7- Unnn..n 5 r a a.... _.- ; Market Units Sold Share to Seg Feat 22% 2,747 Bead 19% 2,365 Ebb 16% 2,008 Cedar 15% 1,889 Dell 14% 1,698 Acre 13% 1,584 Fast 1% 117 Eat 0% 59 Daze 0% 10 Cake 0% 10 Baker 0% 1 Performance Revision Date Stock Out Market Share Actual vs. Potential 35% _ % % 20% Jr 1 I '15% 10% - 5% Top Products In Segment Pfmn Coord Size Coord 1 I i List Price IoActual tipaential Andrews Baldwin Chester Digby Erie Ferris ~ MTBF Age Dec.31 Promo Budget Sales Budget Customer Awareness December Customer Survey Aug-07 YES $ $1,200 $2,200 65% 6-Aug $ $1,250 $794 58% Oct $ $755 $873 39% Jan-05 YES $ $550 $637 30% 14 4-Aug-07 YES $ $1,150 $1,520 62% May-00 YES $ $1,270 $1,328 62% Jul $ $1,200 $2,200 33% 1 24-Mar $ $1,075 $953 22% 0 4-Sep $ $1,100 $1,520 31% 0 6-Aug $ $550 $1,019 17% 0 16-Aug-07 YES $ $1,200 $1,191 32% 0 - Page 6

13 High End CAPSTONE COURIER C9411 Round 3, 12/31/2007 Statistics Total Industry Unit Demand 4,007 Actual Industry Unit Sales 3,566 Segment % of Total Industry 12.3% Growth Rate 16.2% Andrews Baldwin Accessibility j ~T~ I I I Customer Buying Criteria Expectations Pfmn11.6 Size Positioning 2. Age Ideal Age = Reliability MTBF Price $ Importance 43% 29% 19% 9% Digby Erie Ferris,1 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Perceptual Map H Market Share Actual vs. Potential 40% 35% 30% z5% - 20% 15% I o% 5% ID Actual n Potential Performance Andrews Baldwin Chester Digby Erie Ferris Name Market Units Sold Share to Seg Adam 25% 891 Cid 20% 714 Bid 20% 699 Echo 17% 594 Dixie 14% 495 Able 4% 145 Aft 1% 25 Baker 0% 3 Revision Stock Pfmn Size Date Out Coord Coord 1-Aug-07 YES Sep-07 YES Feb-07 YES Jul-07 YES May-07 YES May-07 YES Jul-07 YES Aug-07 YES 7.3 Top Products In Segment List Price MTBF Age Dec.31 Promo Budget Sales Budget Customer Awareness December Customer Survey $ $1,100 $1,461 62% 42 $ $1,075 $1,593 62% 36 $ $1,350 $794 39% 1 $ $740 $794 46% 21 $ $700 $912 56% 11 $ $1,150 $1,594 32% 0 $ $780 $1,129 29% 0 $ $1,200 $1,191 32% 0 Page 7

14 CAPSTONE COURIER C9411 Round 3, 12/31/2007 Performance 1.Reliability 2.Positioning 3.Price 4.Age Perceptual Map Statistics Total Industry Unit Demand 3,293 Actual Industry Unit Sales 3,261 Segment % of Total Industry 10.1% Growth Rate 19.8% Customer Buying Criteria Expectations Importance MTBF % Pfmn12.4 Size % $ % Ideal Age = 1.0 9% I 18 N R 17 ~i~~ !LI t ei a at~ t ~l ~rrrr 13 mtsmna r~c I Performance I Andrews Baldwin Chester Digby Eriek ij r i Accessibility _--J T._ T_-_~T--T_.~. Ferris it 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Market Share Actual vs. Potential OActual n Pden6al ~l 25% 20% 15% 10% - 5% - Andrews Baldwin Chester Digby Erie Ferris Top Products In Segment Name Market Units Sold Revision Stock Pfmn Size List Price MTBF Age Promo December Sales Customer Customer Share to Seg Date Out Coord Coord Dec.31 Budget Budget Awareness Survey Foam 23% Jun-07 YES $ $1,175 $2,200 66% 41 Coat 21% Aug-07 YES $ $1,025 $1,529 64% 38 Dot 20% Apr-07 YES $ $950 $912 65% 28 Aft 20% Jul-07 YES $ $780 $1,129 57% 36 Edge 12% Feb-07 YES $ $250 $675 23% 13 4% Jul-07 YES $ $250 $596 30% 3 Page 8

15 CAPSTONE COURIER C9411 Round 3, 12/31/2007 Size Statistics Total Industry Unit Demand Actual Industry Unit Sales Segment % of Total Industry Growth Rate Customer Buying Criteria Expectations Importance 1.Positioning Pfmn 6.1 Size % 2.Age Ideal Age = % 3. Reliability MTBF % 4. Price $ % 3,284 3, % 18.3% Accessibility Andrews Baldwin Chester Digby Erie I Ferris 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Perceptual Map I T _ r ~ T_ 19 ; 18 I 30% Market Share Actual vs. Potential 0 Actual II Potential r I _ I 25% 20% 15% - 10% r 1 ~ { %- Performance Andrews Baldwin Chester Digby Erie Ferris Name Market Units Sold Revision Stock Pfmn Size Share to Seg Date Out Coord Coord Top Products In Segment List Price MTBF Age Promo Sales Customer Dec.31 Budget Budget Awareness December Customer Survey 49 Cure 22% Jul-07 YES $ $975 $1,593 58% Fume 21% Oct-07 YES $ $1,175 $2,200 61% 56 Dune 19% Jun-07 YES $ $900 $1,216 59% 23 Agape 17% Jun-07 YES $ $685 $1,129 46% 43 Egg 16% Jun-07 YES $ $660 $675 28% 24 Buddy 4% Sep-07 YES $ $500 $596 34% 6 Bid 1% Feb-07 YES $ $1,350 $794 21% 0 Page 9

16 CAPSTONE COURIER C9411 Round 3, 12/31/2007 Industry Unit Sales Vs. Demand 14,000 12,000 10,000 8,000 U Unit Sales MUM Demand Market Segment Shares I Trod n Lew qhigh OPtmn Maize 35% - 30% 25% 20% 6,000 15% 41x Trad Low H igh Ptnn Size El` Andrews Baldwin - Chaster -N Digby Erie - Eertis Segment Market Share in Units Segment Market Share in Dollars Trad Low High Pfmn Size Total Trad Low High Pfmn Size Total Total Units Demanded 9,619 12,488 4,007 3,293 3,284 32,691 Industry Sales $256,852 $243,960 $127,233 $108,384 $103,397 $839,826 Industry Unit Sales 9,619 12,488 3,566 3,261 3,153 32,087 % of market 30.6% 29.1% 15.2% 12.9% 12.3% 100.0% of Market 29.4% 38.2% 12.3% 10.1% 10.1% 100.0% Able 17.0% 0.0% 4.1% 0.0% 0.0% 5.6% Able 16.6% 0.0% 3.0% 0.0% 0.0% 5.5% Acre 0.0% 12.7% 0.0% 0.0% 0.0% 4.9% Acre 0.0% 11.7% 0.0% 0.0% 0.0% 3.4% Adam 0.0% 0.0% 25.0% 0.0% 0.0% 2.8% Adam 0.0% 0.0% 27.0% 0.0% 0.0% 4.1% Aft 0.0% 0.0% 0.7% 19.6% 0.0% 2.1% Aft 0.0% 0.0% 0.7% 20.0% 0.0% 2.7% Agape 0.0% 0.0% 0.0% 0.0% 17.3% 1.7% Agape 0.0% 0.0% 0.0% 0.0% 17.5% 2.2% Total 17.0% 12.7% 29.8% 19.6% 17.3% 17.0% Total 16.6% 11.7% 30.6% 20.0% 17.5% 17.8% Baker 14.4% 0.0% 0.1% 0.0% 0.0% 4.3% Baker 14.5% 0.0% 0.1% 0.0% 0.0% 4.5% Bead 0.1% 18.9% 0.0% 0.0% 0.0% 7.4% Bead 0.0% 18.4% 0.0% 0.0% 0.0% 5.4% Bid 4.6% 0.0% 19.6% 0.0% 1.4% 3.7% Bid 5.2% 0.0% 16.5% 0.0% 1.3% 4.2% Bold 6.8% 0.0% 0.0% 4.1% 0.0% 2.5% Bold 6.9% 0.0% 0.0% 3.4% 0.0% 2.5% Buddy 5.8% 0.0% 0.0% 0.0% 4.2% 2.2% Buddy 5.7% 0.0% 0.0% 0.0% 3.3% 2.1% Total 31.7% 18.9% 19.7% 4.1% 5.6% 20.0% Total 32.4% 18.4% 16.5% 3.4% 4.6% 18.8% Cake 8.9% 0.1% 0.0% 0.0% 0.0% 2.7% Cake 9.4% 0.1% 0.0% 0.0% 0.0% 2.9% Cedar 0.0% 15.1% 0.0% 0.0% 0.0% 5.9% Cedar 0.0% 17.0% 0.0% 0.0% 0.0% 4.9% Cid 0.0% 0.0% 20.0% 0.0% 0.0% 2.2% Cid 0.0% 0.0% 21.6% 0.0% 0.0% 3.3% Coat 0.0% 0.0% 0.0% 21.2% 0.0% 2.2% Coat 0.0% 0.0% 0.0% 21.4% 0.0% 2.8% Cure 0.0% 0.0% 0.0% 0.0% 21.9% 2.2% Cure 0.0% 0.0% 0.0% 0.0% 22.4% 2.8% Total 8.9% 15.2% 20.0% 21.2% 21.9% 15.1% Total 9.4% 17.2% 21.6% 21.4% 22.4% 16.6% Daze 15.9% 0.1% 0.0% 0.0% 0.0% 4.8% Daze 16.7% 0.1% 0.0% 0.0% 0.0% 5.1% Dell 0.0% 13.6% 0.0% 0.0% 0.0% 5.3% Dell 0.0% 13.7% 0.0% 0.0% 0.0% 4.0% Dixie 0.0% 0.0% 13.9% 0.0% 0.0% 1.5% Dixie 0.0% 0.0% 15.2% 0.0% 0.0% 2.3% Dot 0.0% 0.0% 0.0% 19.7% 0.0% 2.0% Dot 0.0 % 0.0% 0.0% 20.2% 0.0% 2.6% Dune 0.0% 0.0% 0.0% 0.0% 18.8% 1.9% Dune 0.0% 0.0% 0.0% 0.0% 19.5% 2.4 % Total 15.9% 13.7% 13.9% 19.7% 18.8% 15.5% Total 16.7% 13.9% 15.2% 20.2% 19.5% 16.4% Eat 12.2% 0.5% 0.0% 0.0% 0.0% 3.8% Eat 11.9% 0.6% 0.0% 0.0% 0.0% 3.8% Ebb 0.0% 16.1% 0.0% 0.0% 0.0% 6.3% Ebb 0.0% 16.5% 0.0% 0.0% 0.0% 4.8% Echo 0.0% 0.0% 16.7% 0.0% 0.0% 1.9% Echo 0.0% 0.0% 16.1% 0.0% 0.0% 24% Edge 0.0% 0.0% 0.0% 12.2% 0.0% 1.2% Edge 0.0% 0.0% 0.0% 11.7% 0.0% 1.5% Egg 0.0% 0.0% 0.0% 0.0% 15.6% 1.5% Egg 0.0% 0.0% 0.0% 0.0% 14.7% 1.8% Total 12.2% 16.6% 16.7% 12.2% 15.6% 14.7% Total 11.9% 17.1% 16.1% 11.7% 14.7% 14.4% Fast 14.2% 0.9% 0.0% 0.0% 0.0% 4.6% Fast 13.1% 1.2% 0.0% 0.0% 0.0% 4.4% Feat 0.0% 22.0% 0.0% 0.0% 0.0% 8.6% Feat 0.0% 20.6% 0.0% 0.0% 0.0% 6.0% Foam 0.0% 0.0% 0.0% 23.2% 0.0% 2.4% Foam 0.0% 0.0% 0.0% 23.4% 0.0% 3.0% Fume 0.0% 0.0% 0.0% 0.0% 20.8% 2.1% Fume 0.0% 0.0% 0.0% 0.0% 21.3% 2.6% Total 14.2% 22.9% 0.0% 23.2% 20.8% 17.6% Total 13.1% 21.8% 0.0% 23.4% 21.3% 16.0% Page 10

17 Perceptual Map CAPSTONE COURIER C9411 Round 3, 12/31/ OP 17 Er Ebb OIMIM Edge Cat 14 Bold MIAMI ~---~- Fa ~ a 1 3 -~- - aze Ab6s I ~ IOW\ u E -.km1m I 11-4 Dixi 10 Dun Ech Egg dam II ill 8 e~f me PW Performance Andrews Baldwin Chester Name Pfmn Size Revised Name Pfmn Size Revised Name Pfmn Size Revised Able May-07 Baker Aug-07 Cake Aug-07 Acre May-00 Bead Aug-07 Cedar Jan-05 Adam Aug-07 Bid Feb-07 Cid Sep-07 Aft Jul-07 Bold Jul-07 Coat Aug-07 Agape Jun-07 Buddy Sep-07 Cure Jul-07 Dig by Erie Ferris Name Pfmn Size Revised Name Pfmn Size Revised Name Pfmn Size Revised Daze Sep-07 Eat Mar-07 Fast Jul-07 Dell Aug-07 Ebb Oct-07 Feat Aug-07 Dixie May-07 Echo Jul-07 Dot Apr-07 Edge Feb-07 Foam Jun-07 Dune Jun-07 Egg Jun-07 Fume Oct-07 Page 11

18 CAPSTONE COURIER C9411 Round 3, 12/31/2007 TQM SUMMARY Process Management Budgets Last Year ($M) CPI Systems Andrews $o Baldwin $o Chester so Digby $10 Erie $150 Ferris $0 Vendor/MT $o $0 $0 $30 $150 $0 Quality Initiative Training $o $o $o $20 $150 $0 Channel Support Systems $o ssoo $0 $500 $150 $0 Concurrent Engineering $2,000 $too $0 $150 $150 $0 TQM Budgets Last Year ($M) Benchmarking $2,000 $o $0 $40 $150 $0 Quality Function Deployment Effort $o $o $o $500 $150 $0 CCE/6 Sigma Training st,000 $o $o $33 $150 $0 Total Expenditures ($000) $5,000 $600 $o $1,283 $1,200 $0 Cumulative Impacts Material Cost Reduction 1.46% 0.00% 0.00% 0.00% 0.00% 0.19% Labor Cost Reduction 0.61% 0.42% 0.00% 0.00% 0.00% 0.00% Reduction R&D Cycle Time 39.57% 5.17% 0.00% 0.04% 0.00% 36.75% Reduction in Admin Costs 39.72% 0.00% 0.00% 0.00% 0.00% 56.35% Demand increase 1.92% 0.02% 0.00% 0.19% 0.00% 0.33% HUMAN RESOURCES SUMMARY Andrews Baldwin Chester Digby Erie Ferris Needed Complement Complement st Shift Complement nd Shift Complement Overtime% o.o% 0.0% 8.5% 10.4% 22.0% 0.3% Turnover Rate 11.1% 10.4% 12.0% 11.7% 13.1% 9.8% New Employees Separated Employees o Recruiting Spend $loo $50 $0 $15 $loo $250 Training Hours o Productivity Index 1.00 too too too 1.00 too Recruiting Cost $331 $656 $230 $181 $101 $225 Separation Cost $o $o $o $o $o $o Training Cost $o $244 $0 $77 $70 $50 Total HR Admin Costs $331 $900 $230 $257 $171 $275 Labor Contract Next Year Wages $23.78 $23.80 $23.41 $24.04 $23.83 $24.41 Benefits $2,688 $2,762 $2,765 $2,700 $2,688 $2,775 Profit Sharing 2.2% 2.2% 2.2% 2.2% 2.2% 2.3% Annual Raise 5.4% 5.5% 5.5% 5.4% 5.4% 5.6% Starting Negotiation Position Wages Benefits Profit Sharing Annual Raise Ceiling Negotiation Position Wages Benefits Profit Sharing Annual Raise Adjusted Labor Demands Wages Benefits Profit Sharing Annual Raise Strike Days Page 12