APC 2011 Annual Report Download - page 37

352011 REGISTRATION DOCUMENT SCHNEIDER ELECTRIC
DESCRIPTION OFTHEGROUP, ANDITSSTRATEGY, MARKETS ANDBUSINESSES
1
RISK FACTORS
These procedures include quarterly business reviews in which
performance and projections are monitored, in terms of activity,
action plans, results to date and forecasts, at all organisational levels
of the Group (see the section entitled “Internal Control and Risk
Management”). The Group also has the necessary competencies
to manage these risks, mainly through its central functions (fi nance,
legal, tax and customs).
The protection provided by these measures may nevertheless
prove to be inadequate.
The growth and success of the Group’s
products depend on its ability to develop new
products and services and adapt to market and
customer needs
The sectors in which the Group operates experience rapid
and signifi cant changes due to the introduction of innovative
technologies. Introducing new technology products and innovative
services, which Schneider Electric must do on an ongoing basis
to meet customers’ needs, requires a signifi cant commitment to
research and development, which may not result in success. The
Group’s revenue and margins may suffer if it invests in technologies
that do not function as expected or are not accepted in the
marketplace or if its products, systems or service offers are not
brought to market in a timely manner, become obsolete or are not
responsive to our customers’ requirements.
To meet these challenges, the Group has an R&D budget which,
at 4 to 5% of revenue, is among the highest in the industry. R&D
and forward-looking engineering involves some 11 ,0 00employees
around the world, a number of them in development centres located
in over 26 countries. This ongoing commitment has allowed the
Group to accelerate time to market and leverage the technology of
strategic partners with whom it has also forged alliances to expand
its line up or geographic coverage. The Group has brought together
all of its electrotechnical, electronic, electromechanical, software
and other technical competencies by creating technology parks in
China, the US, France and Japan.
Support centres have also been established in Mexico, India and
China to provide the technology parks with additional skills and
development capacity at a very competitive cost.
The Group’s business growth depends on its ability to develop,
deepen and enhance customer relationships. The Group must
constantly offer customers innovative solutions built around
high-quality products and services incorporating leading-edge
technologies that are closely tailored to customer needs and
expectations. However, the Group does not have any exposure to
a particular customer. Its ten largest customers represent less than
25% of total revenue.
Increasing customer satisfaction rates represents an important
source of competitive advantage for the Group. It closely tracks the
results of the quarterly surveys conducted in more than 80countries
among all types of customers. Improvement targets are set for each
country as part of the One company program, backed by specifi c
action plans and progress monitoring procedures.
Schneider Electric’s strategy involves growth
through acquisitions, joint ventures and
mergers that may be difficult to execute
The Group’s strategy involves strengthening its capabilities through
acquisitions, strategic alliances, joint ventures and mergers.
Changes in the scope of consolidation during 2011 are described
in note2 to the consolidated fi nancial statements (Chapter5).
External growth projects are examined in detail by the businesses
and corporate functions (strategy, fi nance, legal affairs, tax and
human resources) concerned, under a rigorous internal process
developed and led at Group level. A launch committee is
responsible for initiating the review process to identify the risks and
opportunities associated with each external growth project, while a
number of validation committees review the results on an ongoing
basis. Projects that successfully come through the review process
are submitted for approval to the Group Acquisitions Committee
made up of the main members of senior management. The largest
projects require the prior approval of the Management Board and,
in some cases, the Supervisory Board.
External growth transactions are inherently risky because of
the diffi culties that may arise in integrating people, operations,
technologies and products, and the related acquisition,
administrative and other costs.
This is why an integration procedure for new acquisitions has
been drawn up. The integration of newly acquired businesses is a
process that extends over a period of six to 24months depending
on the type and size of the newly acquired unit. The integration
scenario for each acquisition varies depending on whether the
business was acquired to strengthen or extend the Group’s existing
line-up or enter a new segment. There are a number of different
integration scenarios, ranging from total integration to separate
organisation. An integration plan is drawn up for each acquisition
and submitted to the Acquisitions Committee for approval. The
plan is implemented by an integration manager who reports to a
Steering Committee that initially meets at monthly intervals and then
on a quarterly basis.
The unit that presents the external growth project is accountable to
the Group’s senior management for meeting clearly defi ned business
plan targets covering the performance of the new business and
expected synergies with existing businesses. Actual performance is
measured against business plan targets during quarterly business
reviews and, for the largest acquisitions, by the Management Board
and Supervisory Board.
Value in use is determined by discounting estimated future cash
fl ows that will be generated by the tested assets, generally over a
period of not more than fi ve years. These future cash fl ows are based
on Group management’s economic assumptions and operating
forecasts. The discount rate corresponds to Schneider Electric’s
weighted average cost of capital (WACC) at the measurement
date plus a risk premium depending on the region in question
(local risk- free rate), the nature of the target’s business (appropriate
beta), and the structure of the fi nancing (taking into account the
debt to equity ratio and risk premium on the debt). TheGroup’s
WACC stood at 8.1% at December31, 2011, slightly down on the
2010 fi gure. The perpetuity growth rate was 2%, unchanged on the
previous fi nancial year.
Goodwill is allocated to a Cash Generating Unit (CGU) when initially
recognised. The CGU allocation is done on the same basis as used
by Group management to monitor operations and assess synergies
deriving from acquisitions. Impairment tests are performed at the
level of the cash generating unit in 2011 (CGU), i.e. the Power,