WRSX External Environment Briefing Phase Produced by Andy Carnelley, WRSX Business Analyst

As you have just joined WRSX, please let me introduce myself. I am a Business Analyst reporting to the Director of Market Insights, Bjorn Krog Jensen. My role is to collate information from different sources about what is happening in the external environment that I identify as relevant to the WRSX Group. This of course includes economic data and trends as well as anything else that is happening in our industry sector, or in the broader business environment, that may have a positive or negative impact on our business. My job is to give market insight and allow timely decision-making by the Board in response to what is happening in the external environment. So as you join the Group, what is happening now in the business environment in which WRSX operates? Highlight 1: World Economy: We have all grown used to a period of sustained growth in the world economy and especially the economy of the US, which accounts for nearly 50% of revenue for the global advertising and media communications industry. We see this growth continuing into the next financial year with forecast growth in the industry of about 4% - which is the same as last year. In terms of the medium and longer-term prospects we believe that the future is much less predictable and that the future of our industry will be more risky than in recent years. When our client businesses suffer so does the WRSX Group. Marketing budgets are usually one of the first to be cut in a downturn. While the biggest risk facing our business is that we lose existing clients or fail to attract new clients, there are also risks associated with the effects of global, regional and national economic and political conditions, including fluctuations in economic growth rates, interest rates and currency exchange rates; and developments from changes in the regulatory and legal environment for advertising and marketing communications companies around the world. Some of these changes could have a major detrimental impact on our results. There are lots of unknowns. Many are predicting a severe downturn in the US economy based on the scale of consumer debt and rising oil prices. Governments are working hard to avoid this downturn and we can probably be confident of our 4% prediction for the coming year. Interest rates are low in the US and Euro Zone and are expected to remain so as governments seek to boost consumer spending. In the UK interest rates are comparatively high but are likely to fall if the housing market continues to slow as predicted.

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Highlight 2: Challenge to US market dominance the rise of Asia: Given the prominence of US-based multinationals, you could argue that almost two-thirds of the advertising and marketing services market is controlled or influenced from there. American strength is based on three factors: First, the size and power of the American market; more than 300 million people in a relatively homogeneous market. Despite the European Union being almost twice the size, it is much more heterogeneous. Second, the power and size of US capital markets. If you want to raise debt or equity capital, America still is the cheapest place to go. Finally, because of its strength in technology and digital media. Will China challenge the US in terms of market size and power in the future? Perhaps. In the longer term, we expect any decline in revenues from the US and Western Europe, including the UK, to be offset by growth in revenues generated by the escalation of consumerism in Asia Pacific especially in China and India. In terms of the growth of non-American multinationals, we increasingly see the growth of Asian-based multinationals. Not only the Japanese-based multinationals like Sony or Mitsubishi, or the South Korean-based chaebols such as Samsung, LG or Hyundai. But the Chinese multinationals such as Lenovo, Haier, Konka, Bird, Bright Dairy, China Mobile and China Unicom. And the Indian multinationals such as the two Reliances, Tata, Wipro and Infosys. The latters headcount is up from 15,000 to 60,000 in the past four years. It plans to increase by 50,000 more in the next two years. It is difficult for those of us in the West to comprehend the scale of Asia Pacifics potential development. China is not just one country; it consists of more than 30 provinces, with so many languages and dialects that Mao Tse Tung needed an interpreter. The population is estimated at between 1.3 and 1.5 billion, equivalent to four or five Americas. Currently only 150-200 million Chinese can afford the goods and services we are trying to market to them. However, this is already equivalent to over half an America and this is a dynamic situation, one that will change rapidly in the coming years. Already there are almost 500 million mobile phone subscribers in China, 300 million of which subscribe to one company, China Mobile (one of the top five most valuable world brands) equivalent to the total population of the US. India itself equivalent to three to four Americas seems to have been stimulated into more rapid growth perhaps in response to what is happening in China. Increasingly, Africa is the continent of opportunity, rather than the continent of war, disease and poverty. In particular, North African countries, and especially Egypt, have huge populations with a rising middle class of consumers - but in every country in Africa there are opportunities for FMCG brands.

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Another challenge for multi-national brands is how to target the Muslim world. Already, Muslims number 1.5 billion people or a quarter of the worlds population, rising to 2.1 billion or 30% of the projected worlds population over the next few years. Recent conflicts and terrorist activity reflect the increasing gap between Western nations and some elements of the Muslim population. Westerners have made little attempt to understand the Muslim mind and assume they have the same value systems and beliefs. Global companies must surely work towards a serious and sincere attempt to understand the Muslim world in the coming years. Highlight 3: Changing demographics and values: In the US and Europe demographics will play an important part in consumer behaviour over the coming years , with a higher proportion of retirement age consumers beginning to dominate and create new demands in terms of products and services. Not only is this grey market numerous, in many cases they are also financially well-off and willing to spend their kids inheritance. The other major shift is the smaller number of graduate-age consumers and with it a shift in values characterised by what are known as Generation Y values. These include work-life balance, doing meaningful work and taking time out for giving something back to society through community work. There are examples of government campaigns trying to stimulate the birth rate. Western Europe and Japan face significant economic growth issues as a result of the declining proportion of young people and an overall population decline. Highlight 4: Changes to manufacturing & service locations: Western Europe and the US have stringent employment laws that are designed to protect employees. Many of our client companies are moving their manufacturing bases and service centres outside of these geographic areas in order to maintain their labour force numeric flexibility and avoid costly employment litigation. However, this can backfire when employment practices, especially those that impact on health and safety or child labour, hit the headlines and we have seen some real damage to brands as a consequence of bad PR on this issue in recent years. The emergence of a large consumer market in Asia Pacific, Eastern Europe (especially Russia) and to a lesser extent in Africa are reflections of the need to express psychological, lifestyle and emotional differences. The suit or dress you wear, the car you drive, the holidays you take, how you spend your leisure time all say a lot about your personality and preferences. The Internet has brought prestige brands to a vast audience who were previously unaware of what is and what is not in. Equally, multi-nationals, particularly in the IT industries, are taking full advantage of the ability to recruit globally and to move their global graduate trainees around the world to meet business demands.

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Highlight 5: Manufacturing Overcapacity and the need to differentiate: Looking to the future, manufacturing overcapacity will demand more innovation, stronger brands and greater differentiation. Given a low-inflationary environment, limited pricing power and more concentrated retail distribution, clients are increasingly coming to the view that there is only one way to compete through innovation and branding. Promote on price and you create commodities. Innovate and differentiate, you create brands and the right to demand a premium from the consumer. Corporate strategic plans are increasingly concentrating on managing for growth, instead of managing for value. This is particularly true where companies are competing against low-cost manufacturers or service providers from Eastern Europe or Asia Pacific. There has been a surge in merger and acquisition activity as companies seek to use their brand to drive up prices or to use economies of scale to drive down costs. Highlight 6: The challenge to traditional advertising agencies: Studies show that the biggest growth in advertising over the next ten years will come from digital media. The digital technologies will provide big opportunities as the media landscape fragments and consumers habits evolve. The big question is how well WRSX can position itself to take advantage of this opportunity. In terms of market data and insights, internet-based market research is a major innovation for the 21st century. It enables interrogation of millions of consumers globally at low cost and can deliver answers inside 24 hours. Incidentally, the data protection laws introduced in the US and Western Europe have made this side of the industry susceptible to litigation and as such most marketing communications groups have introduced a strong regulatory policy on the use and disposal of personal data. The emergence of on-demand content and commercial communications and the expansion of the range of digital channels will only increase in the coming years. Already we are seeing the emergence of more and more channels that cater to specialist audiences in terms of interest-groups or demographic profile. Equally, the role of the mobile phone is changing so rapidly that it is hard to keep up with developments. The opportunity for advertisers is enormous but also worrying as companies switch marketing budgets away from traditional media such as TV. Equally, internal communications within large multi-nationals and how they enhance the corporate brand is becoming more prominent as an issue and demanding the expertise of companies in the marketing communications sector. Equally, the demand for internal alignment in big companies and thus the need for internal communications combined with growing retail concentration and the rapid increase in the significance of corporate responsibility will underline the value of our services and expertise to our clients.

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Highlight 7: The rise of Corporate Social Responsibilty: Most major corporations now produce Corporate Social Responsibility or CSR reports alongside their annual financial reports which promote their CSR policies to shareholders. The main measures use in such reports are investment in education and other social projects and investment in reduction of the carbon footprint of the business through initiatives such as more heat-efficient buildings, ability to generate their own electricity, recycling of waste, reduction in business travel etc. For many WRSX client companies the amount and recycle-ability of packaging is becoming a more important issue year on year. So there you have it. The World as I see it today. What will happen in the future? I am a Business Analyst and not a fortune teller. I can make assumptions based on trends and what is happening now. But I cannot predict what might happen in the future that may turn all our assumptions around. I will be giving you external business environment updates over the coming months and I will update you on these trends and help you to identify emerging issues for the WRSX group. See you then.

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