Olam: Threading a New Tapestry

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Olam Threading a New Tapestry Starting Scaling
a Business to Global Leadership Presentation to
SMU EDGE CONFERENCE 2005 Bridging the Gap
Entrepreneurship in Theory Practice
12th July 2005 Singapore
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Presentation Outline

• Our History
• Building the Business Model
• Defining the core business
• Crystallizing the rules of the game
• Setting the Governing Objective
• Creating a sustainable competitive advantage
• Growth Strategy

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Presentation Outline

• Creating Alignment
• Aligning Structure
• Aligning Staff
• Aligning Shared Values
• Aligning Systems
• Building and Monetizing value
• Attracting Private Equity
• Road to IPO
• Learnings about Entrepreneurship
• QA

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Our History
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An Entrepreneurs Job Description
WANTED Entrepreneur Immediate Opening
Exciting, exhausting, high-risk position. Must
have the ability to discover new business
opportunities, discern market needs, and match
with appropriate solutions before they become
obvious. Applicant must be willing to invest hard
work and create effort before others recognize
the merit of their ideas. Ability to work with
financial institutions, investors and venture
capitalists to attract financial backing will be
essential for upward mobility in the position.
Pay will be very poor for failure and very good
for success.
Source (adapted from) Gwartney, James D.,
Richard L. Stroup, Russell S. Sobel, and David A.
Macpherson. Economics Private and Public Choice,
10th Edition. Thomson/South-Western 2003.
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Our History Rapid Growth Expansion

• Sales CAGR 57 and PAT CAGR 50 over the last
  15 years

Transitioned from a Trader to an Integrated
Supply Chain Manager
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Building the Business Model Step 1 Defining
the Core Business Step 2 Rules of the Game
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Defining the Core Business Activity Scope

• Alternatives
• Positional, Proprietary, Directional Commodity
  Trader
• Agricultural Processor
• Supply Chain Manager
• Integrated Supply Chain Manager

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Our Business Supply Chain Manager of
Agricultural Raw Materials
Rule 1 Differential Value Chain Integration
Integrated from farm gate to factory gate
Origin
Customer
Primary Processing
Marketing
Inland Logistics Warehousing
Distribution
Shipping Marine Logistics
Sourcing Origination
End-to-end Supply Chain Capability
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Defining the Core Business Boundaries
Farm Gate
Factory Gate
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Defining the Core Business Product Scope

• Alternatives
• Multiple Commodity Asset Class Player
  Diversified
• Single Commodity Asset Class Player Focused

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Our Products Building Leading Global Position
Rule 2 High absolute Market Share - Top 3
Global Rank

• Edible Nuts, Spices Beans
• Cashew nuts
• Other edible nuts
• Sesame

1.
More than 25 market share of global raw cashew
nut trade

• Spices
• Beans

• Confectionery Beverage Ingredients
• Cocoa
• Coffee

One of three largest suppliers of cocoa robusta
coffee worldwide
2.

• Sheanuts

• Food Staples Packaged Foods
• Rice
• Sugar

3.
One of the top three global rice suppliers

• Dairy products
• Packaged foods

4.

• Fibre Wood Products
• Cotton
• Wood products

One of the leading suppliers of teak in the world
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Defining the Core Business Geography Scope

• Alternatives
• Origin Presence (Producing Countries) OTH
• Market Presence (Destination/Consuming Markets)
  GTH
• Origin Market Presence ITH

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Our Geographies Linking key origins,
processing centres markets
Rule 3 Strong Origin Presence
Rule 4 Strong End Market Presence
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Defining the Core Business Diversification

• Multiple Products (within a single commodity
  asset class)
• Multiple Geographies
• Multiple Suppliers
• Multiple Customers

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Our Customers Strong Customer Base
Rule 5 Direct End-Customer Relationships
Over 3,000 customers, 50 end markets
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Building the Business Model Step 3 Setting
the Governing Objective
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Business Model Governing Objective

• Key issue / challenge
• Setting the Governing Objective

How do we create value in a low margin business?

• Why are we in business ? / Why do we exist ?
• What is our raison detre ? / What is our core
  purpose ?

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Business Model Governing Objective

• Alternatives
• Maximize Profits / Returns
• Be no. 1 or no. 2 in each business
• Balance the Interests of all Stakeholders
• Maximise Shareholder Value over time

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Governing Objective The Margin Conundrum

Example

• Margin in itself is not the end game, creating
  intrinsic Shareholder Value is the ultimate
  purpose.

Profit Margin/ Return on Sales
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Our Governing Objective
Maximising shareholder value over time (in a
socially responsible and environmentally
sustainable manner)
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Our Governing Objective Key drivers

• to maximise shareholder value over time
• value drivers
• opening up the capital spread (ROE Ke)
• increasing the rate of profitable growth
• Sustaining this growth over a period of time
  (competitive advantage period)

Governing Objective
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Governing Objective decomposing ROE
ROE PAT Equity ROE
Profit Margin x Asset Turnover x Financial
Leverage PAT Sales
Assets (D E) Sales
Assets Equity PAT
Sales Assets
Sales Assets Equity
x
x
x
x
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Governing Objective
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Compounding Effect of Growth on Shareholder Value
Ke Cost of Equity g Growth Rate

• Sales CAGR 57 and PAT CAGR 50 over the last
  16 years

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Governing Objective
Rate of profitable growth and its impact
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Fortune 500 (2003) Ranking Analysis
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Building the Business Model Step 4 Building a
Sustainable Competitive Advantage
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Creating an edge Challenges

• How do you create a competitive advantage in a
  scenario where participants have roughly equal
  capabilities, follow roughly similar strategies,
  have roughly the same scale, and have cost curves
  of roughly equal slopes?
• How do you transcend the volume or tonnage
  mentality that grips all players in this space?
• How do you overcome the following common
  assumptions in our industry
• Price is a given
• the customer only cares about price
• Volume is what counts
• How do you market a commodity that has virtually
  no differentiating features and a price that is
  more or less fixed/given ?

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Price isnt everything factors involved in
buying decision
Opportunity for segmentation beyond traditional
differentiators of size geography.
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Segmentation Three kinds of customers
Key Customer preferences
Customer segment
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Industry Analysis

• Liberalisation deregulation of State Commodity
  Boards / monopolies
• Dismantling of trade barriers (WTO initiated)
• Fixed nature of production
• Increasing trend towards processing in the
  producing countries
• Predictable stable demand
• Rising customer expectations

Exploiting these trends requires both origin
market skills
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Unique Competitive Position
Hi
Market Capabilities
Lo
Hi
Origin Capabilities
Global Trade House Origin Trade House

• Combining origin destination market
  capabilities

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Building the Business Model Step 5 Developing
a Growth Strategy
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Sourcing, logistics, primary processing,
marketing/trading, risk management of
agricultural raw materials
Defining our Core Business
Core
Supply chain manager of agricultural raw materials

• Origin sourcing
• Logistics
• Marketing/trading
• Risk management

Primary processing
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Our Growth Strategy Scalability Replicability
Growth Adjacency Vectors
Growth Adjacency Criteria
Planning for Multiple Time Horizons
Product Adjacency
Customer Sharing
Channel Sharing
Geography Adjacency
CORE Supply Chain Manager
Cost Sharing
Value Chain Adjacency
Capability Sharing
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Growth Through Adjacency Our Past
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(No Transcript)
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Executing Strategy Creating organisational
alignment

• How do we create alignment between the various
  parts of our organisation to execute on our
  strategy?

• How do align the hard Ss ?
• - Structure
• - Systems
• How do we align the soft Ss ?
• - People
• - Values
• - Spirit

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• Creating Alignment
• Executing Strategy
• Structure Staff

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• Creating Organisational Alignment Aligning
  Structure

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Designing Structure configuring key management
roles
Worldwide business/product team
Country Management Team
CEO/CET/PT
Worldwide functional managers
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Creating Organisational Alignment Aligning Staff

• Recruitment selection
• Training development
• Deployment
• Performance management
• Career pathing
• Compensation
• Inspiring Motivating

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• our people the heart of our organisational
  advantage

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• Creating Alignment
• Executing Strategy
• Building Culture Shared Values

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our culture stretch and ambition

• The climate of stretch that surrounds Olam,
  in my opinion is the fuel for its growth and
  success.
• Sreekumar Menon,
• Country Head, Russia

• The pace at Olam is invigorating. It has
  succeeded in embedding ambition across the
  organisation.
• Jimmy Wong,
• GM (Shipping), Singapore

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our culture entrepreneurship

• I am impressed by the can do attitude of the
  company and its relentless pursuit of
  profitable growth opportunities.
• Gerry Manley,
• Managing Director (Cocoa), London

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our culture ownership and commitment

• Whichever part of Olam, one is directly
  responsible for, the sense of involvement in the
  organisation as a whole is complete.
• Ram Narayanan,
• GM (PFB), Singapore

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our culture learning organisation

• My exposure in Olam has formed me equipped
  me with the competencies required to move into a
  larger leadership role.
• Raj Vardhan, Regional Controller, China

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our culture leadership and teamwork

• At Olam, I made the transition from being a good
  manager to an effective leader.
• Arun Sharma, Senior Trader (Coffee), Singapore

• Olams success is a function of great teamwork.
  Our shared vision and values binds the team
  together.
• Thomas Gregersen, Senior Trader (Coffee),
  Singapore

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our culture open and flat organisation

• Openness is a vital part of Olams culture.
  Openness to challenge and be challenged and to
  give and receive feedback.
• Rene Goudriaan, VP Product head, Cashew Kernel
  trading, Rotterdam

Olams flat and non-bureaucratic structure, is
striking. This results in more knowledge sharing
and faster decision making. A. Shekhar, Senior
Managing Director, Singapore
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our culture living our values

• Our values are not merely fine words, because,
  for us, it is being them that is at the heart
  of the matter.
• Vivek Verma,
• Managing Director (Coffee Dairy Products),
  Singapore

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• Creating Alignment
• Executing Strategy
• Risk Mgt Systems

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Creating Organisational Alignment Aligning
Systems Risk Management

• Establish governance oversight
• Identify enterprise-wide risks
• Capture measure at the transactional level
• Monitor manage risks
• Create an organisational culture which respects
  risk

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Identify Risks in our Supply Chain

• Insurable Risks
• Cash stock
• Fixed assets
• Inland marine transit
• Political sovereign

• Noninsurable Risks
• Operational risks
• Information risks
• Market risks
• Outright price
• Basis
• Currency
• Credit counterparty

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Capture, Measure, Monitor Manage Risk

• Capturing Value at Risk ( VAR )
• Proprietary model for measuring risk at the
  transaction level
• Dynamic monitoring stress testing on a
  portfolio level
• Measuring risk return
• Business performance measures chosen are risk
  adjusted (RAPAT RAROC)
• Operating managers manage risk return on a
  real time basis
• Compensation systems based on risk-adjusted
  business performance measures

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• Building Monetizing Value
• Attracting Private Equity

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Overcoming Misconceptions

• Trading Company
• Commodity Company
• Emerging Market Company
• Family Owned Business
• Indian Family Owned Business

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Phase 1
Attracting Private Equity Transcending
Misconceptions

• AIF Capital Oct 2002, Jan 2004
• Temasek Holdings Nov 2003
• IFC Dec 2003

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New Governance Structure

• Board
• Board Committees
• Independent Directors

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Our Board Corporate Governance
DIRECTOR Peter Amour AIF Capital (Non-Executive)
CHAIRMAN M. K. Chanrai (Non-Executive)

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VICE CHAIRMAN R. Jayachandran (Non-Executive)
DIRECTOR Andy Tse AIF Capital (Non-Executive)
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DIRECTORN. G. Chanrai (Non-Executive)
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DIRECTOR Wong Heng Tew Temasek Holdings (Non-Execu
tive)
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DIRECTORSunny Verghese Group MD
CEO (Executive)
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DIRECTOR Mark Daniell (Independent)
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DIRECTOR Sridhar Krishnan Snr Managing
Director (Executive)
DIRECTOR Michael Lim (Independent)
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DIRECTOR A. ShekharSnr Managing
Director (Executive)
DIRECTOR Robert Tomlin (Independent)
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• 6 Board Committees
• 75 of the Board is Non-Executive.

• 25 is independent additional 25 of the Board
  would represent minority interest

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• Building Monetizing Value
• Road to IPO

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Phase 2 IPO
Positioning the Company

• Strong financial track record
• Unique competitive position
• Proven growth model
• Well-diversified across businesses, geographies
  customers
• Risk management is a core competence
• Strong Management
• High governance standards world class investors
• Strong prospects high growth potential

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Successful IPO

• Listed on SGX 11th February 2005
• Issue oversubscribed 16 times
• Issue priced at top end of the book building
  range
• Over 200 global institutional investors of high
  standing
• Good research coverage
• Market capitalisation S1.725 billion (amongst
  the top 45 listed companies in SGX)
• Share price appreciation of 79 in the first four
  months

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Our shareholding structure
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Top 20 Shareholders
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Recognitions
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Learnings about Entrepreneurship
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Defining Entrepreneur
Bearing Risk (Investor)
An Entrepreneur assumes/bears the risks of a
business and at the same time organises/manages
and grows/scales an enterprise.
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Perspectives on Entrepreneurship
"The title of entrepreneur should, however be
confined to an owner or manager who exhibits the
key trait judgment in decision making. Judgment
is a capacity for making a successful decision
when no obviously correct model or decision rule
is available."- Casson, Mark. The Fortune
Encyclopedia of Economics. Entrepreneurship.
Ed. David Henderson. New York Warner Books, 1993
"Entrepreneurs create wealth by offering what is
perceived to be a more valuable combination of
resources than the combination that existed
previously. Profits are an entrepreneur's reward
for increasing the wealth of individuals in
society. The entrepreneur does not profit at the
expense of others. Rather, he gains because the
product of his actions is judged to be worth more
than what existed before his undertaking."-
Younkins, Edward W. Capitalism Commerce.
Lanham, M.D. Lexington Books, 2002
The essence of entrepreneurship consists in
seeing through the fog created by the uncertainty
of the future. He is inspired by the prospective
profitability of seeing the future more correctly
than others do."- Kirzner, Israel M. How markets
work Disequilibrium, Entrepreneurship and
Discovery. London The Institute of Economic
Affairs, 1997
They are the first to understand that there is a
discrepancy between what is done and what could
be done. They guess what the consumers would like
to have and are intent on providing them with
these things."- Mises, Ludwig von. Human Action.
Chicago Henry Regnery Company, 1966
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Entrepreneurship as a discovery process
I think there is a world market for maybe five
computers. - Thomas Watson, Chairman of IBM,
1943
There is no reason anyone would want a computer
in their home. - Ken Olson, President, Chairman
Founder of Digital Equipment Corp, 1977
This telephone has too many shortcomings to be
seriously considered as a means of communication.
The device is inherently of no value to us. -
Western Union internal memo, 1876
The concept is interesting and well-formed, but
in order to earn better than a C, the idea must
be feasible. - A Yale University management
professors response to Fred Smiths paper
proposing reliable overnight delivery service.
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Entrepreneurship as a discovery process
The abdomen, the chest, and the brain will
forever be shut from the intrusion of the wise
and humane surgeon. - Sir John Eric Ericksen,
British surgeon, appointed Surgeon-Extraordinary
to Queen Victoria, 1873
We dont like their sound, and guitar music is
on the way out. - Decca Recording Co.,
Rejecting the Beatles, 1962
Stocks have reached what look like a permanently
high plateau. - Irving Fisher, Professor of
Economics, Yale University, 1929
Everything that can be invented has been
invented. - Charles H. Duell, Commissioner,
U.S. Office of Patents, 1899
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Entrepreneurship Myths Stereotypes

• Single individual
• Single episodic act
• Breakthrough idea/technology
• Attractive industry economics
• Bet the Company risks / one big leap vs series of
  sequential steps
• Tangible asset / resource based competency vs
  intangible assets/ capabilities

Pursuing profitable growth through business model
innovation
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Nike vs Reebok
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Walmart vs Kmart
Germany Brazil Asia U.K. Smaller scaleformat
Wholesale suppliers Deepdiscounter Mexico Cana
da
Wholesale Club Supercenter format Discount
retailers
Ranked 1 Company on Fortune 500
1970 32 stores Focused on small midsize towns
Wal-Mart overtakes Kmartas 1 US retailer
First Wal-Mart store opened
2002
1990
1980
1970
1962
First Kmart store opened
1970 200 stores Aggressive expansion of Kmart
stores
Filed for Chapter 11 Bankruptcy
Book Stores HomeImprovement stores Drug
StoresCanadian Discount outlets Warehouse Clubs
Specialty Sports Stores Office Supply
stores CzechoslovakianDepartment
stores Mexico Book Stores
Australia
Desperate Divestitures
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Walmart vs Kmart
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Dell vs Gateway
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GE
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Blythe Industries
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Steve Jobs tells Stanford Graduates
If you live each day as if it was your last,
some day, you will most certainly be right
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Steve Jobs tells Stanford Graduates
Stay hungry, stay foolish
Steve Jobs quoting Stuart Brand, Publisher of
The Whole Earth Catalogue
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Thank You
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Q A