22 | NEC Integrated Report 2021 | 23 | |
NEC's Business Model
Mid-term Management Plan 2025
Mid-term Management Plan 2025
Achievement of NEC's "Purpose"-A Combination of Strategy and Culture
The NEC Group has formulated the Mid-term Management Plan 2025, which concludes in fiscal 2026, with the aim of realizing the NEC 2030VISION and NEC's "Purpose" set forth in the NEC Way. Under the Mid-term Management Plan 2025, we have set indices for strategic and cultural targets for promoting the management of NEC's Purpose.
Strategy: We will achieve growth through acceleration of global growth and transformation of domestic businesses by providing customer value through NEC technology. In financial terms, our financial strategy is integrated with our business strategy, with the first priority being to maximize long-term profit, followed by optimizing short-term profit.
Culture: We believe that our cultural strength is the strength of people to implement our strategies and realize our purpose. We will aim to be a company that pursues innovation and brings together diverse human resources under the NEC Way-the NEC Group's common set of values that form the basis for how the Group conducts itself.
Purpose
Strategy | Culture | ||||
EBITDA Growth Rate: 9% annual average | 50% Engagement Score | ||||
(FY2021-FY2026) | (FY2026) | ||||
Accelerate global growth and business transformation | Transform to a company that pursues innovation and | ||||
in Japan by leveraging strengths in technology, "Maximizing | brings together diverse people under the NEC Way | ||||
long-term profit" and "Optimizing short-term profit" | (common values): "Employer of Choice" | ||||
Mid-term Management Targets | |||||
(Billions of yen) | FY2021 Results | FY2026 Targets | |||
Revenue | 2,994.0 | 3,500.0 | |||
(Growth rate from FY2021) | - | 3.2% | |||
Adjusted operating profit | 178.2 | 300.0 | |||
(Revenue %) | 6.0% | 8.6% | |||
Adjusted net profit | 165.4 | 185.0 | |||
(Revenue %) | 5.5% | 5.3% | |||
EBITDA*1 | 295.8 | 450.0 | |||
(Revenue %) | 9.9% | 12.9% | |||
ROIC*2 | 4.7% | 6.5% |
*1 EBITDA = Gross profit - SGA expenses + Depreciation/amortization
*2 ROIC = (Unadjusted operating income - Deemed corporate tax [30.5%])÷(Term-endinterest-bearing debt + Term-end net assets [Including minority interest])
Achieve Earnings Growth through Both Growth Businesses and Base Businesses
Growth businesses are classified as digital government/digital finance, global 5G, core DX, and future growth businesses, whereas base businesses are all other businesses.
In growth businesses, the NEC Group will prioritize the allocation of resources in order to acquire and strengthen its competitive advantage, with the aim of driving growth in revenue and profits. In base businesses, given the cautious business environment, the focus will be on improving profitability and aiming to steadily improve profit.
Revenue | Adjusted Operating Profit |
3,500.0 billion yen | 300.0 billion yen |
Component | Component | Adjusted OP ratio | |
ratio of growth | |||
ratio of growth | businesses | 8.6% | |
businesses | 32.9% | Growth businesses | |
12.7% | Growth businesses | Adjusted OP ratio | |
DG / DF | Adjusted OP ratio | ||
Global 5G | 5.1%* | 12.9% | |
Core DX | Base businesses | ||
Future growth businesses | |||
Base businesses | Adjusted OP ratio | ||
10.0% | |||
FY2021 | FY2026 | Others | |
FY2021 | FY2026 |
* Excluding "One-time profit/loss" in the statement of profit or loss
Digital government/ | • Transform into a top-class vertical SaaS vendor in the global DG/DF market | ||
Digital finance | |||
Global 5G business | • Aim for 20% market share in the Open-RAN market in 2030, including expansion in the | ||
Japanese market from primarily a base station hardware provider to a full software and | |||
hardware solutions provider | |||
• Expand our value proposition through a comprehensive approach encompassing | |||
consulting to delivery | |||
Business | • Price strategy and gross profit improvement through common ICT platform | ||
Core DX business | technologies and offerings | ||
Strategies | • Strengthen competitiveness through hybrid IT (Cloud/DC/On-Premises) alliances and | ||
Strategy | in-house optimization | ||
• New business opportunities (social, enterprise transformation) | |||
Expand the DX domain by leveraging the implementation capabilities of technology/policy | |||
linkage/E2E | |||
Future growth businesses | • Create growth businesses that will realize the NEC 2030VISION with strong technologies | ||
and inbound innovation | |||
Base businesses | • Maintain profitability above our competitors for our high -andmedium-profit base businesses | ||
• Improve profitability by establishing a monitoring system for low-profit businesses | |||
Financial | Maximizing long-term profit and | • Use continuously generated cash flow to fund sustainable growth and enhance corporate | |
value through optimal capital allocation and by building robust financial and non-financial | |||
Strategies | Optimizing short-term profit | ||
measurement methodologies | |||
Transformation of culture | • Transformation of people and culture | ||
Culture | • Establishment of business infrastructure | ||
and how we work | |||
• Creation of a shared vision for a brighter future | |||
24
NEC's Business Model
Mid-term Management Plan 2025
Business Strategy
Digital Government and Digital Finance Business
NEC Integrated Report 2021 | 25 | |
Core DX Business
Mid-term Targets
(Billions of yen) | 300.0 | ||
193.1 | Revenue CAGR | 210.0 | |
4%* | |||
EBITDA | 125.1 | 20% | |
17% | 12% | ||
margin | 4% | ||
Adjusted | |||
OP ratio | FY2021 | FY2026 | |
Total Acquired companies * CAGR is pro forma based.
We intend to expand business in digital governments and digital finance by promoting organic growth in the European market and leveraging three European companies acquired during the Mid-term Management Plan 2020-NEC Software Solutions UK, KMD Holdings ApS (KMD), and Avaloq Group AG (Avaloq). We will also engage in cross-sales and bolt-on acquisitions toward the same goal. We are also taking steps to integrate and optimize our existing assets while restructuring our business foundation. Both of these actions will help stabilize our business foundation.
In addition, we will increase business synergies through deeper integration of government and finance and other domains, made possible by taking advantage of cost syner- gies, sales synergies, and greater usage of digital IDs. Another strategy we are planning to undertake is the creation of new growth areas, which involves finding new business opportunities from customers in different industries.
Acquired companies' assets | NEC's assets | |||||
Software | Technology (Biometrics/AI) | |||||
SaaS platform | Engineering capability | |||||
Mid-term Targets
(Billions of yen) | 570.0 |
Revenue CAGR | 13% |
32% |
141.0 | ||
Adjusted | -3% | |
OP ratio | ||
FY2021 | FY2026 |
We are ramping up investments in core digital transformation (DX) to spur transformation in our domestic IT business. Our goal is to improve operating profit ratio from 8% to 13% by moving from an individualized optimization model that is optimized for each industry and customer, to a model that utilizes DX to allow for optimization across the board. To this
by adopting a consistent approach encompassing consulting to delivery. This strategy relies on a combination of the upstream consulting strength of ABeam Consulting Ltd., which operates on a domestic scale of 5,000 consultants, and the strength of NEC's delivery capabilities.
The second strategy is to improve profitability and price competitiveness through common ICT platform technologies and standardized offerings. Our plan is to create a platform using NEC technology that will effectively facilitate effective DX for both companies and society with the idea that repeated usage will reduce costs. We also aim to improve price competitiveness by standardizing our solution offerings and setting prices based on value provided.
Our third strategy is intended to increase competitiveness by creating a hybrid IT environment through an optimal combination of cloud, data center, and on-premises functions.
This IT environment will be optimized to meet individual needs through the combination of NEC's own high-security,multi-cloud and global strategic collaborations with AWS (Amazon) and Azure (Microsoft).
As a fourth strategy, we will work to lead the shift in society with DX. To do this, we will coordinate with government
Global 5G Business
Mid-term targets
(Billions of yen) | 190.0*1 |
Stabilization by remodeling business foundations,
including three recently acquired companies
Earnest pursuit of business synergy and creation of new growth areas
Phase 1 of our plan for the Global 5G business, which we aim to complete by fiscal 2023, aims to create a series of global firsts in terms of commercial achievements on the back of alliances with NTT Corporation and Rakuten Mobile, Inc.
end, we will build a system more attuned toward providing value to customers by first creating a common platform to utilize NEC's strengths in R&D and engineering, and then incorporating inbound technology from external sources through M&As and venture capital.
We have highlighted four strategies toward transforming the IT business in Japan. The first is to expand value provision
policy and utilize our technologies, such as biometrics and AI, as well as our end-to-end implementation to back projects that will transform society. These projects involve the steady promotion of DX in domestic governments spurred on by the establishment of the Digital Agency, the construction of super cities, and infrastructure-collaborative mobility.
Based on this strategy, we intend to take a leading position in overseas markets as a vendor of Open RAN, taking advantage
Customized Vertical Solutions | Cross Industry Solutions |
Revenue CAGR
35%
41.7*110%
Adjusted | FY2021 | FY2026 | |
OP ratio | -31%*2 |
*1 Netcracker is not included.
*2 Excluding strategic expenses; profit ratio above segment (Network Services) level
of differentiated technology and considerable performance in terms of TCO.*
For Phase 2, which is to be completed by fiscal 2026, we will shift our profit focus from hardware to software licensing by enhancing applications and other end-to-end capabilities.
* Total Cost of Ownership
Phase 1 ~ 2022
Establishment of Open RAN vendor position in overseas markets
Phase 2 ~ 2025
Expansion of SW/service business segments and acquisition of profit sources
Cu | Cu | Cu | Cu | Cu | |
Industry/ | Industry/ | Industry/ | Industry/ | Industry/ | |
stomer | stomer | stomer | stomer | stomer | |
• | Individual SI | Transformation | |||
• | NEC products | ||||
- Other company prod
- Technology
R&D
Cu | 4 New business opportunities | ||
Industry/ | (social, enterprise transformation) | ||
stomer | |||
Digital | Smart cities | Infrastructure- | |
government | collaborative mobility |
Core DX Business
- From consulting to delivery
- Common ICT infrastructure technologies and offerings
-
Hybrid IT (Cloud/DC*/On-Premises)
* DC: Data center
Engineering | Assets acquired | Inbound |
through M&A | ||
capability | ||
NPS/KMD/Avaloq |
26 | NEC Integrated Report 2021 | 27 | |
NEC's Business Model
Mid-term Management Plan 2025
Creation of Future Growth Businesses
Looking to the future, the Mid-term Management Plan 2025 also calls for the creation of future growth businesses, in addition to digital governments, digital finance, 5G, and core DX. NEC's disruptive technology stands to upend the mainstream technologies of the current day. It is the basis of our efforts to create new businesses, and we will work with forward-looking customers in Japan and overseas and research institutions in Japan and abroad to commercialize the technology, applying the business development know-how we have cultivated in
Accelerating commercialization by integrating R&D and business development
Disruptive technologies
Unique technologies that could disrupt current business models (privacy-preservingdata-analytics)
Defense technologies (quantum cryptography, laser communication, etc.)
Inbound innovation
Overseas business models and industry-specificknow-how Collaboration with advanced customers, research institutions, and
Base Businesses
To improve the profitability of our base businesses, we have set a hurdle rate for operating profit ratio and divided the businesses into categories, and are using this rate to conduct a Group analysis, after which we will clarify policies in response to the analysis and formulate individual plans accordingly. For medium- and high-profit businesses, we will select benchmark companies and strive to overtake them in terms of operating profit ratio. As for low-profit businesses, we will formulate
individual turnaround plans aimed at improving profitability. After this, we will monitor the progress of the plan, take resources from businesses that do not achieve their objective, allocate them to key areas, and take appropriate action. With these measures, we expect to reap the benefits of our improvement plan, complete our review of our business port- folio, and raise profitability up to our target level by fiscal 2026.
recent years. Our target business areas align with the layers of the NEC 2030VISION: environment, society, and life.
We plan to create growth businesses that will help realize the NEC 2030VISION, using our highly capable technology, overseas business models abroad, industry know-how, and collaborations with research institutions and venture capitalists as starting points.
venture capitalists
New business development know-how
dotData, AI-based drug discovery, and other new business development achievements
Business development methods* utilizing internal and external capital
* Carve-out, M&A, spin-in/spin-out, crowdfunding
Adjusted OP ratio | |||
High-, medium- profit | |||
15.0% | business | ||
FY2026 | |||
10.0% | Low-profit | ||
business | High-, medium- profit | ||
FY2026 | |||
business |
Specific examples of initiatives:
1) Healthcare and life-related businesses; FY2031 NEC healthcare business value: 500.0 billion yen*1
5.0% | FY2021 |
Low-profit | |
business |
Deliver healthcare | AI-based | Electronic |
analysis of | ||
tailored to people's | endoscopic | medical |
images; sales | records and | |
health conditions | launch in Japan | ordering |
and Europe | system | |
Monitoring and |
Living life to
the fullest
• Overcome diseases |
• Prevent illness |
FY2021 | |||||
0 | 1,000 | 2,000 | 3,000 | Revenue | |
(Billions of yen) |
Low-profit business monitoring system
Electronic medical | provision of | Visualization of |
advice based on | health condi- | |
records and | gait conditions | tions and |
from insoles | disease risks | |
ordering system | equipped with | from minimal |
gait analysis | blood protein | |
Support | Start of clinical | Design of |
trials on | ||
personalized | personalized | vaccines |
healthcare with | neoantigen | against the novel |
vaccines in | coronavirus | |
science | 2019 |
*1 Calculated using both the comparable company method and the DCF method based on a target for 2030 (sales revenue of 100.0 billion yen)
• Lack of want |
• Mental and physical wellness |
Healthcare
industry
33.0 trillion yen*2
*2 Source: Future Direction of the Next Generation Healthcare Industry Council (published by the Ministry of Economy, Trade and Industry, 2018). Market size is an estimate of the Japanese market in 2025.
Strategy formulation
Implementation,
evaluation
FY2021 2H
- Setting of hurdle rate
- Formulation of turnaround plan
- Implementation of investments to carry out plans
- Review of business portfolio
- Exit/resource allocation from underperforming business to key segments
Specific examples of initiatives: 2) Businesses related to carbon neutrality
-
For more information on our businesses related to carbon neutrality,
please refer to the section "Contributing to Decarbonization through Business."
Reaping of results | End of FY2026 |
● Achievement of target levels |
28 | NEC Integrated Report 2021 | 29 | |
NEC's Business Model
Mid-term Management Plan 2025
Financial Strategy
Transformation of Culture and How We Work
Enhancing Cash Generation Capabilities by Building Robust Financial and Non-Financial Measurement Methodologies
We will aim to become a company that pursues innovation and brings together diverse human resources under the NEC Way as well as a company that is the preferred choice of
Engagement Score 50FY2 26%Target
Under the Mid-term Management Plan 2025, NEC will shift to management that emphasizes capital efficiency and undertake capital allocation to secure investment funds, which will underpin its medium- to long-term growth. We will also continue to build on our robust financial and non-financial measurement methodologies in order to ensure sustainable growth while strengthening our ability to respond to changes in our business environment so that we do not miss out on key opportunities.
By means of growth strategies and management foundation reforms, we will continue to bolster our ability to create cash while pursuing a business structure conducive to constantly generating adjusted operating profit of ¥300.0 billion by fiscal 2026.
- Please refer to the CFO Message on page 30 for more details on our financial strategy.
Augment growth strategies
Shift from P/L management to management that also emphasizes capital efficiency
• Achieve investment returns beyond the market expectations (capital cost)
• Continue activities to improve capital efficiency, such as CCC compression and reduction of cross-shareholdings
Capital allocation focusing on business growth
Respond to changing business environments
without missing out on opportunities
Building of robust financial and non-financial measurement methodologies aimed at sustainable growth
• Maintain investment capability to respond to global competitors
• Reinforce non-financial measurement methodologies to underpin sustainable growth of the company and society
employees. To realize an engagement score of 50%, we will transform people and culture, establish a business infrastruc- ture, and create a shared vision toward realizing a brighter future with customers.
1. Transformation of People and Culture
We will proceed with the transformation of people and culture by emphasizing our key initiatives of accelerating diversity, which serves as an inspiration for innovation, and advancing workstyle reforms in order to provide a better work- place environment to a diverse array of individuals.
To accelerate diversity, we will specifically focus on actively recruiting and systematically developing diverse talent, including female and non-Japanese employees. Our offices, which were previously used as our main work space, will now be utilized as a communication hub and setting for the joint creation of innovation through the further refinement of our NEC Digital Workplace and the realization of location-free productivity improvements. Through such measures, we will reform workstyles and mindsets with the aim of improving our engagement score.
*
(FY2021 25%)
- Based on the Kincentric Survey of a 50% score, which is a Tier 1 level and in the global top 25 percentile
Active Participation of Diverse Talent FY2026 Target
Women/Non-Women Japanese20%Officers 20managers%**
* Target values are for NEC HQ alone.
Reinforcing Non-Financial Measurement Methodologies to
Underpin Sustainable Growth
"Materiality" in the Mid-term Management Plan 2025 (from fiscal 2022)
Key Themes (Materiality) | Main Initiatives | FY2026 KPIs | ||
E | Climate change | 1. Acceleration of environmental management toward achieve- | 1. 33.6% reduction* | 2 |
ment of SBT*1 1.5 ºC by 2030 | ||||
(Decarbonization) | 2. Contribution to CO2 reduction through customer DX | (compared with FY2018) | ||
S | Security | 1. Development of human resources in advanced security to | 1. Doubling of internationally certified personnel | |
AI & human rights | handle social infrastructure | 2. Incorporated initiatives based on the AI and | ||
Diverse human resources | 2. AI provision and utilization prioritizing respect for human rights | Human Rights Principles | ||
G | Corporate governance | 1. Further improvement of transparency of corporate governance | 2. Suppliers agreeing to procurement guidelines: | |
Supply chain sustainability | 2. Strengthening of collaboration with suppliers from a human | 75%*3 | ||
Compliance | rights/environmental perspective | 3. No. of serious incidents: 0 | ||
3. Eradication of serious compliance incidents |
*1 Science Based Targets (SBT): Corporate CO2 emissions reduction targets that are in scientific agreement with the global target of the Paris Agreement *2 Scope 1, 2
*3 Ratio based on procurement amount
We will also engage in job-based management, which aims to fill each position with the right person for the job at the right time and place, and human resource development that emphasizes the cultivation of digital talent.
2. Establishment of Business Infrastructure
Contrary to our previous structure through which various initiatives were carried out by our respective departments, our new Transformation Office has been established under the direct control of the CEO. The Transformation Office will be tasked with managing business process reforms, financial system reforms, and the Group-wide IT system, while serving as the nucleus for our promotion of reforms in the three domains of business processes, systems, and IT system.
In regard to our IT system, we will proceed with cloud transformation of the NEC Group's core system, redesign business processes and systems in unison with IT, and revamp our data-driven management.
3. Creation of a Shared Vision for a Brighter Future with Customers
As a market leader, we believe that it is our responsibility to create a shared vision
Initiatives under the new MTP
- Cloud transition of Companywide mission- critical systems (HR, procurement, etc.)
- Integrated redesign of processes, systems, and IT
- Enhancement of data-driven management (AI utilization, data structure optimization)
Over the course of the Mid-term Management Plan 2025, we will reinforce our efforts in non-financial domains with a particular focus on materiality-priority management themes from an ESG perspective-and disclose information in a highly transparent manner with the aim of achieving continuous inclusion in ESG indices, which are used to determine ESG investments. We believe that this inclusion in ESG indices will lead to the fostering of employees' engagement in the Company and increase their motivation, in addition to earning the trust of society and capital markets.
Materiality under the Mid-term Management Plan 2025 was revised on the basis of material issues uncovered in fiscal 2019 under the Mid-term Management Plan 2020. We reviewed the materiality in light of changes to the demand from the business environment and society, through workshops held for managers of growth business under the Mid-term Management Plan 2025 and dialogues with external experts.
- For more details, please refer to "Priority Management Themes from an ESG Perspective-Materiality" on page 8 of Sustainability Report 2021.
for a brighter future with customers by actively communicating our future vision to customers and society as a whole. By doing so, we will look to create new value.
In addition, our Thought Leadership activities will proceed in full swing from fiscal 2022 toward the realization of an even better future by developing a common outlook toward the NEC 2030VISION based on our social/market insights and an in-depth awareness of our technology.
While strengthening our general research capabilities, which constitute the core of our dissemination/communication activities, we will establish an advisory board that draws on the insights of external experts and promote social change.
Full-scale launch of Thought Leadership activities
- Refine our future vision based on social/ market insights
- Dissemination of social system innovations
- Strengthen general research capability and collaborate with other thought leaders
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NEC Corporation published this content on 10 November 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 10 November 2021 03:04:08 UTC.