industry and strategic analysis for a start up …industry and strategic analysis for a start up...
TRANSCRIPT
Industry and Strategic Analysis
for a
Start Up Manufacturing Company
in a Mature Industry.
Matthew Janes, P.Eng., M.E.Sc., University of Western Ontario, 199 1.
PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF
Master of Business Administration EMBA Program
in the Faculty
Business Administration
@Matthew Janes SIMON FRASER UNIVERSITY
August 2004
All rights reserved. This work may not be reproduced in whole or in part, by photocopy
or other means, without permission of the author.
APPROVAL
Name:
Degree:
Title of Project:
Matthew Janes, P.Eng.,
Master of Business Administration
Industry and Strategic Analysis for a Start Up
Manufacturing Company in a Mature Industry.
Supervisory Committee:
Senior Supervisor Associate Professor Faculty of Business Administration
- Dr. Elicia Maine Assistant Professor Faculty of Business Administration
Date Approved: / 0 August 2004
PARTIAL COPYRIGHT LICENCE
I hereby grant to Simon Fraser University the right to lend my thesis, project or
extended essay (the title of which is shown below) to users of the Simon Fraser
University Library, and to make partial or single copies only for such users or in
response to a request from the library of any other university, or other educational
institution, on its own behalf or for one of its users. I hrther agree that permission for
multiple copying of this work for scholarly purposes may be granted by me or the
Dean of Graduate Studies. It is understood that copying or publication of this work
for financial gain shall not be allowed without my written permission.
Title of Thesis/Project/Extended Essay:
Author: Osignatw-e)
ABSTRACT
This paper details the optimal strategy for Resonance Technology International
Inc., a start up company developing high frequency vibratory equipment for the pile
driving industry. The proposed technology offers a new method of developing high
frequency vibratory energy at frequencies that have not been available previously. The
application of the technology to the pile driving industry is considered disruptive to the
market place.
A detailed analysis of the industry and the market opportunity is provided.
Industry analysis is based upon Porter's five forces and the market analysis upon a bottom
up strategy. Several market entry strategies are described and analysed for the short term
and long term participation of the company in both the pile driving market and for the
potential development of the technology in new markets. Market entry is analysed based
upon penetration and skimming models and evaluated using Analytical Hierarchy Process
(AHP). Recommendations are made based upon the analysis for the optimal strategy for
the company and the technology in both the short and long term. A short term entry
strategy using a slow skimming model with partnering in the distribution channel is
recommended. The recommended long term strategy includes maintaining presence in
the pile driving industry if participation in the distribution channel can be secured. IF the
distribution channel is to remain independent then RTI should divest itself of license in
the pile driving industry to fund application of the technology in alternative applications.
DEDICATION
To:
Dick, Juliet and Maria who make all things possible,
and to
Maria, Kieran, Giovanna and Juliet who make all things worthwhile.
ACKNOWLEDGMENTS
I would like to acknowledge the contribution of the faculty and staff of the Simon Fraser
University EMBA program who created an environment that was stimulating, enjoyable
and honest. I would also like to thank the EMBA class of 2002 for their contribution to
my learning, growth and pleasure. In particular I would like to thank my team-mates of
Joint Venture: Carol Beisel, Anthony Cheung, John McKinstry and Peter van Engelen,
who were inspirational, humorous and Clydesdales when it came to capacity. Thank you
especially for 'picking it up' while I was 'laying down.'
I must thank, with all of my heart and those of my wife and family, the faculty and staff of
the EMBA program for their caring and assistance during the past year of my life. It
would not have been possible for me to overcome the barriers placed before me and
complete the program and return to good health without their commitment to me as a
person first and as a student second.
Our gratitude is boundless, but does not exceed the gift you gave.
I hope to surround myself in life with people like you.
TABLE OF CONTENTS
.. Approval ....................................................................................................................................... 11
... Abstract ....................................................................................................................................... 111
Dedication ................................................................................................................................... iv
Acknowledgments ........................................................................................................................ v
Table of Contents ........................................................................................................................ vi ... List of Figures ........................................................................................................................... VIII
List of Tables ............................................................................................................................... ix
1 Resonance Technology International .............................................................................. 1
1.1 Products .......................................................................................................................... 2 1.2 Focus .............................................................................................................................. 9
.......................................................................................................................... 1.3 Market 10 ............................................................................................. 1.3.1 Customer Analysis 13
1.3.2 Competitive Analysis ......................................................................................... 15 ................................................................................................................ 1.3.3 Pricing 16
................................................................................................... 1.3.4 Future Markets 17 ........................................... 2 Industry Analysis: Foundation Construction Equipment 21
2.1 Porter's Five Forces ..................................................................................................... 23 2.2 High Rivalry Amongst Competitors ............................................................................ 24
.................................................................................................. 2.3 Low Barriers to Entry 33 2.4 Low Bargaining Power of Suppliers ........................................................................ 35 2.5 High Bargaining Power of Customers .................................................................... 35 2.6 Low Threat of Substitutes .......................................................................................... 37
2.6.1 Introducing a disruptive substitute .............................................................. 39 ..................................................................................................................... 2.7 Summary 4 0
3 Industry Value Chain ...................................................................................................... 43
3.1 Exploring the Company Value Chain .......................................................................... 50 ............................................... 3.1.1 Option 1: Distribution through a single channel 51
............................................ 3.1.2 Option 2: Distribution through multiple channels 53 .......... 3.1.3 Option 3: Extension of the value chain to include contracting services 55
4 Strategic Analysis ........................................................................................................... 57
4.1 Strategic Alternatives ................................................................................................... 57 4.2 Near Term Strategy. Establishing a Business Foothold ............................................... 57
4.2.1 Rapid Penetration .............................................................................................. 58 4.2.2 Rapid Skimming ................................................................................................ 59 4.2.3 Slow Skimming ................................................................................................ 60
........................................................... 4.3 Long Term Strategic Focus: Leveraging Value 61 4.4 Key Success Factors ..................................................................................................... 66
4.4.1 External Success Factors ................................................................................... 68 .................................................................................................. 4.4.2 Internal Factors 71
4.5 Assessment of Strategic Alternatives ........................................................................... 74 .......................................................................................................... 4.5.1 Short term 75
4.5.1.1 Rapid Penetration ......................................................................................... 75 4.5.1.2 Slow Skimming: Distribution ....................................................................... 77 4.5.1.3 Slow Skimming: Services ............................................................................. 78
4.6 Long Term Strategy ..................................................................................................... 79 4.7 Discussion .................................................................................................................... 88
............................................................................................... 5 Strategic Implementation 91
5.1 Company Value Chain ................................................................................................. 91 . . .
........................................................................................................ 5.2 Primary Act~vitles 93 5.2.1 Logistics and Man~ifact~~ring ............................................................................. 93
................................................................................................................... 5.2.2 Sales 96 5.2.3 Marketing ........................................................................................................... 99
. . . 5.2.4 D~stributlon ...................................................................................................... 100
...................................................................................................... 5.3 Support Activities 102 ..................................................................................................... 5.3.1 Procurement 102
5.3.2 Technology and Development ......................................................................... 102 5.3.3 Firm Infrastructure & Human Resources Management ................................... 105 5.3.4 Legal Services .................................................................................................. 106
.................................................................................................... 5.3.5 Management 106 5.3.6 Financial Forecasts .......................................................................................... 109
................................................................................... 5.3.6.1 Further Assumptions 112 ......................................................................................... 5.3.7 Balance Sheet Items 113 .......................................................................................... 5.3.8 Cash Requirements 114 ........................................................................................ 5.3.9 Break-even Analysis 116
...................................................................................................................... 6 Conclusion 117
Appendix A: Piling Hammers: A Brief Description ............................................................. 119
Appendix B: History of Resonant Pile Driving ..................................................................... 125
Appendix C: Description of Competitors .............................................................................. 133
......................................................................... Appendix D: Forecast Financial Statements 136
Bibliography ........................................................................................................................... 144
vii
LIST OF FIGURES
Figure 1 . 1 Market Analysis for North American Deep Foundation Construction ....................... 1 1 Figure 1.2 US Construction Activity & Pile Driving Equipment Sales 2000-2003 ..................... 12 Figure 1.3 Typical client profile ................................................................................................... 14 Figure 2.1 Porter's 5 forces as applied to the Foundation Construction Equipment Industry ..... 26
................................................................................................... Figure 3.1 Industry Value Chain 44 Figure 4.1 Proposed organisational chart for slow skimming distribution strategy ..................... 89 Figure 5.1 RTI Corporate Value Chain ........................................................................................ 92 Figure 5.2 Break-even Analysis for Fiscal 2006 ........................................................................ 1 16
LIST OF TABLES
Table 1.1 Value proposition for the Resonant Hammer ................................................................. 7 Table 2.1 Industry manufacturers. type of product line and pricing strategy ............................... 23 Table 4.1 Template for the AHP model ........................................................................................ 67
.................................................................................... Table 4.2 Short term strategy AHP model 75 Table 4.3 Long term strategy AHP model .................................................................................... 80 Table 5.1 Personnel forecast for the 1" 3 years. 2005-2007 ......................................................... 93 Table 5.2 Proposed RTI management team growth ................................................................... 107 Table 5.3 Forecast RTI Income Statement. 2004 through 2009 ................................................ 111 Table 5.4 AP. AR and Inventory account schedule .................................................................... 114 Table 5.5 Forecast RTI Balance Sheet. 2004 through 2009 ....................................................... 115
1 RESONANCE TECHNOLOGY INTERNATIONAL
Resonance Technology International (RTI) is an innovative start up company
developing patented technology for a high frequency vibratory hammer capable of
attaining resonance in structures. The hammer may be used for the construction of deep
foundations (piles), geotechnical drilling and a number of other applications. RTI will
manufacture equipment for sale through partnered distributors to construction service
providers (contractors). RTI has purchased exclusive, perpetual rights to the patents for
geotechnical and construction applications.
The company is a registered Canadian Corporation located in Vancouver, Canada.
It is managed by the two founding principals, Matthew Janes, P.Eng., of Vancouver and
Stewart Page, Ing., of Adelaide, Australia. Two additional founding shareholders include
Dr. David Bies and Paul Gerrard. At present there are no paid employees at RTI.
The principals of Resonance Technology International have raised over $500k US
in funding for the design, fabrication and operation of a 260 kW (350 horsepower {Hp))
prototype hammer. The prototype hammer will be deployed in the fall of 2004 for
demonstration of pile driving and environmental drilling applications. RTI will partner
with contractors in Vancouver and Seattle to field test and demonstrate the equipment on
construction sites. Following the successful demonstration of the prototype hammer RTI
will design and fabricate 50 Hp hammers for geotechnical drilling and 350 Hp hammers
for foundation construction.
Stewart Page and Dr. David Bies are the owners of the patents and principals at
Resonance Technology Pty (RT Pty), an Australian company that markets the technology
within the defence industry. The equipment is used to create the sound and vibration
characteristics of military ships as part of an underwater array to sweep for mines. In
addition RT Pty has used the technology to densify ceramic materials for the aluminium
industry.
Deep foundations (piles and shoring) and deep holes are drilled into the ground
(for purposes of piling, mining, soil investigation or oil exploration) using a variety or
combination of means. To accomplish this either a steel tube (pipe or drill casing which
is threaded and screwed together), H pile or concrete pile will be inserted into the ground.
The variety and combination of technologies is wide and the reasons or perceptions as to
how and why each is preferably used are even wider. Let it be said that the activity is
often described as an art, and the elements of the construction value chain are sufficiently
varied to sustain that perception. In order to assist in the understanding of the types of
equipment described in this analysis a number of photos with descriptions are provided in
the Appendix A, which should be quickly reviewed to enhance the understanding of the
following analysis.
1.1 Products
Until now there has existed no high-powered machine capable of efficiently
producing high frequency (60 - 250 hertz) vibration. Most conventional high-powered
vibrators are limited to a maximum frequency of 20 to 25 hertz. Achieving higher
frequencies permits the user to create resonance in a long column or foundation pile. The
concept of resonance is demonstrated in the process of pushing a child on a swing,
shattering a wine glass with a tuning fork or the destruction of the Tacoma Narrows
Bridge by the action of the wind. Resonance is defined as the prolongation or
amplification of oscillation of a mechanical system under the influence of a periodic
external excitation. Thus a child on a swing is elevated to great amplitudes by the small
periodic force provided by each push. The key concept here is that the push is supplied at
just the right time and in just the right phase (direction). The adult pushes the child when
it is moving down from the peak height. Mis-timing the push, either too early or too late,
or pulling instead of pushing would result in wasted energy or even slowing the child
down. The energy provided by each push is stored in the system, kinetically (at the
bottom) and potentially (at the far peak) and built upon by each subsequent push. The
effort that would be required to raise the child and the swing in one single movement is
much greater than that supplied with each individual small push. Similarly a wine glass
is shattered because the tuning fork applies a small cyclical force in tune with the natural
frequency of vibration of the glass and thus amplifies the stress in the wine glass until it
breaks. The wind blowing across the deck of the Tacoma Narrows Bridge in 1946,
created a foil effect that provided an oscillating upward and downward force in perfect
harmony with the natural frequency of the bridge. The repeated force increased the
amplitude and stresses within the bridge deck until it reached failure. Earthquakes
provide the same type of cyclical excitation and the phenomenon of resonance is why
only the 10 story structures were destroyed in the recent great Mexico City earthquake.
Resonance requires the input of energy in a timed fashion, matching that of the vibration
of the object to be excited. The trick is to apply the energy at the exact frequency to cause
resonance. To achieve this deliberately, as opposed to serendipitously, is the key to
achieving great efficiencies and creating useful energy available for work. But to achieve
this efficient harmony requires a great deal of finesse.
The resonant vibratory hammer represents breakthrough, disruptive technology
offering increased productivity, versatility and reduced maintenance costs to the end-user.
The versatility and efficiency of the system represents a revolutionary leap forward in pile
driving and drilling technology that will eclipse existing equipment.
During conventional pile driving a hammer blow creates a compressive wave that
travels down the pile, advancing it into the ground. When the compressive wave reaches
the toe of the pile it reflects as a tension wave and travels back to the top of the pile.
There is a large amount of energy still present in the tension wave as it reflects to the top
of the pile. However, this energy is allowed to dissipate gradually into the soil where it
cannot be recovered. As a result the conventional pile driving process is only about 30%
efficient. Resonant pile driving can take advantage of this reflected energy and make it
available to do work.
During resonant pile driving as the pile vibrates elastically from compression into
tension the resonant hammer provides timed synergistic energy input. During a cycle of
compression in the pile the resonant vibrator applies a downward or compressive force
(during the pile's advance) followed by a timed tension force (pull) when the pile springs
back into tension, thus enhancing the force in the pile during each cycle.
Imagine a long steel pipe (a pile) suspended in the air that can be pulled upon at
both ends (creating tension in the pipe) and then suddenly released. The pipe would
elastically spring from tension into compression, becoming slightly longer during tension
and shorter during compression. It would vibrate in this manner until all the energy had
been dissipated into sound or heat. Now imagine applying a force at one end that would
oscillate in perfect harmony with the vibration of the pipe. We can now increase the
force stored within the pipe with each cycle by simply adding force with every cycle. In
this manner the elastic rebound force of the previous cycle (or blow) is enhanced with
every cycle. The pile is being driven at the highest possible efficiency, in phase with its
natural period of vibration.
Unlike existing impact pile driving hammers that may waste over 70% of the
energy due to inefficient transfer and shaking the ground around the pile, the resonant
hammer harnesses almost 100% of the energy translating it directly into the pile. It builds
upon and re-uses the energy so it can be efficiently used. The resonant hammer uses the
energy to cut the soil at very high accelerations and reduces the energy radiated into the
ground where it is lost. The increased efficiency of resonance results in:
Higher production & faster holes;
Smaller power packs, lower energy costs and less pollution;
Lower weight, requiring smaller cranes and handling equipment;
Little vibration to surrounding soil so that the hammer can be used for
higher margin projects such as environmentally sensitive areas and adjacent to
historical structures.
The proposed technology is revolutionary in its simplicity with only four moving
parts and is controlled by a proprietary electronic feedback system. The only moving part
subjected to high vibrational forces is the simple external casing. Conventional
equipment has over 100 moving parts subject to high vibration or impact forces. Thus the
resonant hammer is:
Less expensive to manufacture;
Less expensive to maintain, suffering fewer breakdowns and downtime;
Longer lasting, with fewer major overhauls;
Lower warranty costs.
In the construction industry, increased production and product reliability are the
primary drivers for the buying decision, rewarding high quality, innovative manufacturers
with high profit margins. The resonant hammer can replace both existing impact and
vibratory hammers (which are used for different applications) and increase site
production by 30 - 40 %. The increased efficiency of the resonant hammer will result in
daily crew savings for the contractor of over $1,800. As shown in Table 1.1 the actual
time required to drive a typical pile 24 m (80 ft) in length using either a conventional
impact hammer or low frequency vibratory hammer is compared to the anticipated time
required to drive a pile using the resonant hammer. The resonant hammer provides
significantly greater driving production: 18 minutes versus 70 minutes for an impact
hammer and 80 minutes for a conventional vibratory hammer. The time required to pick
up and orient (set up) a pile and to complete a weld are the same for all operations. Thus
the total time required to complete a pile is substantially longer than the actual driving
time. Note the time required to set a splice is included in the overall completion time but
the time to weld the pile is not. This is because the welding operation does not require
the crane to be present at all times. When the pile splice is set, a single pass of weldment
may be placed to create a safe situation for the crane to release the top portion of the pile
and perform productive work at another pile location while the welders conduct the
additional passes of weldment to complete the splice.
"The crane does not remain over the pile during splicing. It can go and work at another pile while the welders are con~pleting the
splice and thus the 45 minutes required to aplice is not tallied in the total crew driving time.
Table 1.1 Val~le proposition for the Resonant Hmmer.
Activity
Pick up Pile
Set up
Drive I st Splice
Set Splice
Weld Splice *
Drive to Depth
Move
Total time
Crew Hour
Cost per pile
Cost 400 lin ft
There are negligible switching costs because the contractor can use its existing
Existing Vibratory Hammer Minutes
7
8
10
10
45
70
10
120
$648.00
$1 296.00
$5,184.00
Existing Impact Hammer Minutes
7
8
25
10
45
45
10
110
$600.00
$1 ,I 00.00
$4,400.00
base equipment and hydraulic power packs. The combination of increased applications
and efficiency will appeal to foundation contractors and drilling companies through
Resonant Hammer
Minutes
7
8
6
10
45
12
10
58
$648.00
$626.40
$2,505.60
increased profit, increased efficiency, greater reliability, reduced costs and reduced time
to project completion.
Savings $
$473.60
$1,894.40
Resonance Technology Pty has used the technology since 1993 to create the sound
Savings O/O
47O/0
43%
43%
and vibration characteristics of military ships to sweep for mines. The development of
this application proves the technology operates effectively, through millions of cycles in a
harsh seawater environment subject to high impact (explosive) loads. The design issues
regarding flow rates, materials, seals, tolerances, fatigue and surface treatments have been
solved. The technology has won a National Australian Engineering Excellence award for
innovation.
The proposed technology is patented in the USA, Canada, Australia, Europe, and
South East Asia. The patented embodiments include the mechanical design of the valve
porting and the electronic feedback control and algorithm used to monitor and adjust the
performance of the device. Patents were awarded in the years 1993-1996 and have been
actively applied to acoustic and ceramic densification applications. The proposed
development of the technology offers patent enrichment opportunities through new
electronic control and mechanical clamping system.
The proposed design is revolutionary in its simplicity using only a servomotor and
four moving parts. A central stationary sleeve houses a rotating spline valve. The
servomotor turns the spline valve, which redirects the flow of hydraulic fluid through
holes in the stationary sleeve to an external casing that vibrates up and down. The only
moving part subjected to vibrational force is the simple external casing. The mechanical
elegance of the system lies in the placement and simplicity of the rotating spline valve.
The valve is hollow and very light, resisting movement only through rotational inertia.
The valve is situated immediately within the vibrating casing and thus positioned at the
place where work is conducted. The strategic placement of the valve eliminates hydraulic
fluid inertial effects during flow switching and minimises frictional losses. Thus the
system is simple, has few moving parts subject to wear or maintenance and is
inexpensively manufactured.
An important, patented feature of the technology (which is not available with
existing vibrators) involves the ability to tune the operating frequency of the vibrator to
the changing natural frequency of the drive system. As the pile is driven into the soil its
natural frequency will change (generally decreasing) due to the effects of the surrounding
soil. The proposed technology self-regulates the operating frequency to maintain
resonance by monitoring of the return hydraulic pressure. The resonant hammer
electronically monitors its performance and uses a proprietary algorithm to adjust and
optimise the operating frequency.
Significant historical precedence exists for using high frequency (sonic) vibrators
to install pile foundations. A large research program funded by Bodine Industries, Shell
Oil and Hawker Siddeley developed a mechanical rotating mass sonic vibrator. The
program produced small drivers (that are the basis for today's small sonic hammers) for
environmental work and large drivers for foundation construction. The drivers proved to
be highly efficient and capable of advancing deeper, faster, more efficiently and with less
soil disturbance than conventional equipment. See section Appendix B describing the
history of existing sonic hammer technology.
The bearings and shafts of the Bodine hammers were prone to catastrophic failure
and the design proved to be un-scalable. The current small sonic hammers are expensive
to manufacture, plagued by high maintenance costs and frequent component failure. The
proposed technology is radically different than the Bodine technology. The advantage of
the proposed design lies in its simplicity, which does not rely upon shafts or roller
bearings that under-go high vibration loading.
1.2 Focus
This study will focus on an entry and long term strategy for a new technology in
the foundation construction equipment market. The study will undertake an industry
analysis and examine the power and value of distribution and brand within the market.
The industry will be broken down into its elements and the contribution of each element
within the value chain evaluated. In particular the strength and sustainability of
innovation and research and development within the value chain will be explored. In
addition the power of brand, relationships and service at the distribution end and its
influence in the buying decision will be analysed. The existing market is highly
fragmented. There are few truly new or differentiated products amongst the existing
manufacturers. The sales cycle is long and typically relationship and service based.
The remainder of this chapter will provide: the background information on the
existing and proposed technology, a description of the existing market, customers, pricing
and conclude with a discussion of future markets for exploitation.
1.3 Market
The North American deep foundation construction industry is a multi billion
dollar per year marketplace for services, materials and equipment sales. Evaluation of
Stats can ' , US census2, E N R ~ and the Dodge ~ e ~ 0 1 - t ~ indicate the international
foundation construction market produces annual equipment sales of over US $350 million
for impact and vibratory hammers alone. A similar market exists for soil investigation,
mining and water well equipment with annual sales of over US $250 million. Sales of
vibrators for soil densification are estimated to exceed US $750 million.
The bottom-up and top-down approaches were employed to estimate the size of
the market opportunity. Since all the deep foundation equipment-manufacturing firms are
privately held', a survey of the principals at several of the larger f i i s was conductedii.
The survey consisted of questioning the participants on their estimates of the market size,
their competitor's annual revenues, annual spending by customers on new pile driving
equipment and rentals, and market growth predictions for the next five years.
$95M (USD) 4%
Figure 1.1 Market Analysis for North American Deep Foundation Construction
The senior representatives of the two main construction industry associations: the
Deep Foundation Institute (DF@ and the Association of Drilled Shaft Contractors
(ADS@ were contacted regarding their estimates of the market breadth for both
A publicly held Dutch Company recently purchased International Construction Equipment (ICE) in early 2003. It is anticipated their consolidated statements will not be available until mid 2004.
ii These included: Dave Yingling, sales and marketing manager for APE, Seattle, WA, Ron Jeffries,VP Sales and Production for Berminghammer Foundation Equipment, Hamilton, Ont., Rick Sadler, Sr. Sales Manager NE region ICE, Raleigh, NC and Christian Houze, Director of PTC Corporation, Paris, France
contracting as a whole and equipment sales. Each of these organizations has conducted a
market analysis within the last 3 years and confirms our estimates of the North American
market. The results were a conservative estimate range of US $95 million (Figure 1.1) to
US $137 million a year in equipment sales, parts and rentals, with 17 significant players.
US Cons t r~~ t i~n ActOvIty & Pile Equipment Number of Project Starts $ M i l l i o n Contruction Starts
$1 50
Figure 1.2 US Construction Activity & Pile Driving Equipment Sales 2000-2003.
The bottom up estimate was compared with a top-down look at the industry. Data
from various sourcesiii, including industrial building permits by value, was factored for
growth (based on the stable historical rate of 3% per year), and combined with an average
capital expenditure of 5% of total revenues by foundation contractors. The result was an
estimate of US $66 million for direct new equipment sales. This figure can reasonably be
doubled to arrive at a figure of US $132 million a year to include parts, service and
iii US Economic Census and Statistics Canada
service and rentalslv. These estimates were then reviewed with the principals of the
manufacturing companies for verification and positive confirmation.
1.3.1 Customer Analysis
The construction industry is in a continuous process of modernisation with
competitive contractors forced to make significant annual expenditures on equipment.
The market is accustomed to adopting new technology to increase efficiency and
production and generate cost savings. In the construction industry increased production
and equipment reliability drive sales as opposed to price points. The market trend is
towards greater reliance on versatile equipment with a reduction in labour costs. Thus the
market rewards high quality, innovative manufacturers with high sales volumes.
The typical customer is a privately held contractor-proprietor with a sound
understanding of the equipment and its use. Customers are not predominantly price
sensitive, however, they claim to the contrary. They place significant emphasis on
production capacity and reliability. Products must have unquestioned reliability with a
proven track record of performing in all types of weather and soil conditions. "Time is
money" to contractors and they cannot afford downtime on equipment with crews left
standing idle. The industry is extremely competitive with tight margins and deadlines
where jobs are often awarded on less than 1% price difference or time savings amounting
to only days on multi-month schedules. Given this dependence on their equipment,
customers insist on a high level of service support to correct any equipment outages. It is
expected on major equipment that a service representative be on-site within hours of the
IV The bottom up evaluation indicates new equipment sales average 5Ooh of a manufacturer's revenues. The remaining revenues are generated through manufacturer supplied rental pools, parts sales and specialty equipment development.
13
outage, no matter where the location. To meet this requirement for a high level of after
sales service, distributors require regional sales offices with experienced staff either
owned by the manufacturer or contracted out through the many independent equipment
suppliers.
The target customer for the resonat hammer would be considered a medium to
large full services contractor with the financial profile provided in Figure 1.3. This
contractor would posess the necessary equipment pool and annual equipment budget to
become a repeat customer, or use multiple hammers.
TYPICAL FOUNDATION CONSTRUCTION CONTRACTOR:
Annual sales $20 million (USD) Drive steel piles & drill concrete piles
P Owns $ 8 million Equipment Pool P Owns $800K Hammers and Vibrators 9 Spends $800K Annually on Equipment P Spends $ 1 million Annual Maintenance
Daily rig costs $4,400 Resonant hammer daily savings >$1,500
Annual savings > $375,000 v
Figure 1.3 Typical client profile
The contractors' repeat business is heavily dependent upon their reputation for
completing projects on time and on budget. Contractors are thus very interested in new,
production saving equipment, but require tangible evidence of its reliability. They will
quickly adopt new equipment but require a trial period with significant supplier support
and redundancy prior to all-out acceptance. Demonstrations are crucial in satisfying the
customer on the performance claims of the equipment and as such will be a central focus
in promoting the RTI technology.
1 J.2 Conzpetitive Analysis
The major competition in the construction market comes from privately held
manufacturers and distributors of impact and low frequency vibratory hammers. These
companies also manufacture support equipment, accessories and specialised base
machines (cranes) for the equipment. The RTI hammer will cannibalise existing hammer
manufacturer's impact and vibratory hammer product lines. This will induce many
manufacturers to attack RTI and use defensive strategies to sustain market share.
However, some manufacturers will seek alignment with RTI.
RTI is presently negotiating alignment with an industry leading manufacturer and
distributor of a complete range of foundation construction equipment. This will ensure
distribution of the equipment and one stop shopping for customers who require
accessories and base machines. The three major construction equipment competitors to
RTI are International Construction Equipment (ICE, Amsterdam, The Netherlands /
Raleigh, NC), American Piledriving Equipment (APE, Seattle, WA) and Prockdks
Techniques De Construction (PTC, Paris, France). Together these companies have
annual worldwide sales of over US $125mm.
An analysis was conducted of the top seven competitors in the North American
industry (Appendix C), which details their strengths, weaknesses, performance trends,
Chart constructed from embedded industry knowledge, interviews with heads of major contractors and discussions with directors of industry associations.
strategic alliances (if any), and revenue streams. The analysis has shown that there has
been few new competitors to emerge into this mature market and compete successfully
against the well-established players. One recent success is APE, which has aggressively
marketed itself and is the leader in both traditional and Internet marketing. Given the
commoditization of pile-driving equipment in this mature market, all competitors are
close in price, and, in fact, after-sale service is often the differentiator.
Today several geotechnical drilling contractors use low power high frequency
vibrators for environmental, water well and soil investigation drilling. These companies
include Sonic Drilling (Vancouver), Boart Longyear (Minnesota), Resonant Sonic
International (Woodland, CA) and TONE Drills (Tokyo). Each of these companies use a
high frequency head based upon the Bodine technology with vibration power limited to a
maximum of approximately 30 to 40 Hp. Most of these users manufacture their own
parts and have a significant investment in parts and personnel who are experienced with
the technology and can keep it runnjng. The proposed design will compete at a similar
price point but offer improved reliability over the existing low horsepower high frequency
vibrators.
1.3.3 Pricing
The construction market represents an excellent opportunity for a tool with the
flexibility of the RTI technology. The technology is expected to increase daily crew
productions by up to 40%. This will permit a significant premium on pricing over
conventional hammers. The average cost of a conventional 350 Hp hammer is US $100K
plus the power pack at US $75K. The price of existing equipment that is competitively
sized (650 Hp) to a 350 HP high frequency hammer is on the order of US $138K plus a
power pack of US $158K for a total of $296K. Using a price point to capture the
expected 40% increase in productivity would permit pricing of up to US $493K. This
price allows for a margin of approximately 82% on the 350 Hp hammer. Our analysis of
the market highlights the willingness of contractors and construction companies to pay
for a quality product. The market is accustomed to paying a premium for quality products
with proven superior technology. Premium pricing is easily rationalized with labour cost
savings and the potential for winning additional bids.
Further analysis will show that the greatest potential for pricing advantage will be
obtained through a rental only model. Placing a similar premium on existing equipment
rental rates permits an attractive return on investment for supply of a rental pool of
equipment. This scenario, along with a discussion of other benefits will be provided in
the chapter on strategy.
1.3.4 Future Markets
Following the establishment of RTI products within the construction market new
applications for the technology will be sought. These markets include offshore oil
conductor driving, oil well services, geophysical sound source services, soil densification,
ceramic brick manufacturing, mine tailings precipitation and chemical process mixing
and catalysation.
The first new target market will be the offshore oil conductor driving market. The
conductor market presently uses large pile driving hammers to install exploration and
production wellhead conductors into the ocean floor. Introduction of a resonant vibratory
hammer to this market would revolutionise the industry with the potential for very high
margins. Offshore pile and conductor driving is supplied through contract services to the
drill rig operator. RTI will exclusively supply and operate the equipment to partnered
contractors to increase production and achieve greater depths of penetration. A
significant advantage will be obtained by the partnering contractor, which will permit
preferential pricing and high profitability.
Additional related markets within the oil well services industry include cleaning
of scale from within production wells and freeing stuck pipe. Cleaning of scale is
achieved through a process known as sonic cleaning. The vibrator produces stress waves
with high pressure peaks and low pressure troughs. These waves set up stress patterns in
the base metal which the scale, dirt or residue caked onto the surface of the base metal
cannot keep pace with and thus it 'falls off.' Similar technologies are used in many
manufacturing processes. Stuck pipe occurs when an internal casing is inserted into a
larger diameter casing during the process of drilling a well deeper or servicing a
production well. The smaller pipe must negotiate curves in the larger casing and / or
rough spots where weldments or previous damage to the casing exist. It is difficult to
manipulate the end of the pipe when it is down the casing many thousands of feet. Often
turning the top of the pipe or pulling the pipe simply binds the inner casing into the outer
casing further up along the length of the pipes. Setting up a resonant condition in the pipe
is an efficient manner of transmitting energy (displacement) to the tip of the pipe or
somewhere deep along its length. Once mobilised and moving the pipes may then be
freed by turning or pulling at the top.
Geophysical testing is used to measure the waves reflected by the earth from some
initial shock or vibration. Originally the initial shock was provided by an explosive
charge, which sent an impulse into the earth. The reflection of the impulse from the
interface between changing rock layers would provide information regarding the rock
density and elastic characteristics. These characteristics could often lead to the
determination of the presence of hydrocarbons. At present the initial shock is produced
by a vibrator that provides a range or 'sweep' of frequencies. The vibrators used today
suffer a great deal of noise in their signal due to the mechanism used. Noise is the
presence of frequencies other than the desired frequency. It is like experiencing high
static on the radio during a talk program. The static interferes with certain sounds and
makes it difficult to understand the discourse. It is possible that the proposed technology
could provide a cleaner (low noise) and stronger signal for this application.
In the civil engineering and construction industry soil densification is a key
component to the successful erection and servicing of a facility. Roads and dams are
enormous earth moving and compaction endeavours whose successful function is
dependent upon the quality of soil densification achieved. Future settlements, cracking
and failure are traceable to achieving the specified soils density. At present soil
densification is achieved using various rolling or flat plate vibratory equipment. There is
little attention paid to the tuning of the vibration to the response of the soils or the real
time monitoring of the densification achieved. The proposed technology will take
advantage of the higher frequencies of vibration possible to create resonance in the soil
mass during higher levels of densification. This is believed to enhance the rate and
degree of densification possible. Each attribute will save time and create greater
efficiencies at the job site.
Applications in ceramic brick manufacturing are available through the method's
proven ability to create higher densities in granular materials. Ceramic bricks are used to
line aluminium, steel and other smelting ovens. These bricks are expensive to purchase
and replace in addition to the cost associated with oven downtime. By achieving higher
densities in the bricks during manufacturing, greater life has been witnessed with
subsequent prolonged oven life.
Studies have been conducted in Australia that indicate the use of high frequency,
high pressure standing waves in mine tailings may induce precipitation of the solute
within the tailings mixture. This would enable accelerated treatment times for tailings
slurries, selective precipitation of coarse solutes at the tailings dam face and reduced
overall tailings volumes and dam sizes. Any of these benefits would increase the
economic viability of mines worldwide.
The technology can be used to accelerate the mixing of materials or to catalyse
chemical processes simply through the agitation of a paddle at its natural frequency. The
increased efficiency and rate of mixing will be a benefit to a variety of industries.
2 INDUSTRY ANALYSIS: FOUNDATION CONSTRUCTION EQUIPMENT
This analysis of the North American foundation construction equipment industry
is made in the context of an innovative product offering that spans the market with a
broad range of applications. The scope of the foundation construction equipment market
will be confined to the equipment specific to installing piles by driving (impact) or
drilling into the ground. This will include impact and vibratory hammers, drill heads and
'drifter' heads (combined turning and percussion) that are directly used as specialty
equipment mounted on a base machine or crane. Associated ancillary equipment will be
discussed in the context in which it influences sales (bundling) or delivery of the specific
equipment discussed.
Resonance Technology International is a start up company bringing to market a
new vibratory hammer technology that will enable faster and more efficient installation of
pile foundations and the drilling of deep, cased holes into the ground. The technology is
referred to as a 'resonant hammer.' This tool is expected to have a disruptive impact
upon the breadth of the equipment available and directly upon the contracting industry. A
study of the present foundation construction equipment industry is undertaken to analyse
its structure and to explore the opportunity this new tool will have in the market place.
This study treats the proposed offering as a substitute product in the industry.
The North American equipment market is concentrated with two major
manufacturers, APE and ICE who have 20% and 26% of the market share respectively.
There exist approximately 30 other manufactures or product offerings of various
descriptions in the world market, see Table 2.1. It is important to note that ground
conditions and foundation applications influence which and how certain methods or
equipment will be preferred and thus determine which products act as substitutes or
competitors. At present a single method or type of equipment cannot be recognized as
having ubiquitous conditional or economic applicability. Each of the available methods
maintains a place and application within the marketplace. In most cases variances in
material and labour costs will determine which method and equipment will be used. It is
market share that is influenced by the introduction of new supply or the positioning of the
existing offerings.
The market for equipment consists of regional contractors who use the equipment
to construct foundations on a tendered project basis. There are two main access points for
the end user through the existing channels. The manufacturer either sells directly through
its own distribution network or under a relationship basis with regional, independent
equipment suppliers. The contractors obtain the equipment in two ways: either through
direct purchase (either outright or through lease to purchase) or via short-term rental.
Many independent distributors act as rental suppliers with little emphasis on equipment
sales, concentrating solely on the rental of specialty and ancillary equipment. In these
situations bundling often becomes an important value added feature. Here the distributor
will rent an entire integrated package of leads, hammer, drive cap, boom head attachment
and kicker so that the contractor supplies only the base crane and the distributor provides
the equipment (see appendix) and service expertise to deliver a complete working
package.
The proposed product is treated as a substitute within the industry for this
analysis. In addition the product is deemed to offer the first legitimate opportunity within
the last 30 years to provide a truly differentiated product. The last differentiated products
Conmaco I I LP Delmag 1 Tunkers HP I MP I
Berminghammer Bmce BSP
Low Pnce = LP Medium Pnce = MP High Pnce = HP
MP
HPSI ICE IHC IHI J&M Junttan
vi Table 2.1 Industry manufacturers, type of product line and pricing strategy
MP MP
within the marketplace were the diesel impact hammer and the low frequency vibratory
MP MP
MP
hammer introduced to the North American market in the 1960's and 1970's respectively.
Each of these products enjoyed initial differentiation that was rapidly eroded by
MP
MP
substitutes and competitive mimicry.
MP
HP
HP
2.1 Porter's Five Forces
This analysis focuses on the North American marketplace through an examination
of Porter's five forces as they describe the attractiveness of the industry. A detailed
Chart constructed from embedded industry knowledge, interviews with heads of major contractors and discussions with directors of industry associations.
breakdown of the five forces is provided in Figure 2.1, including: rivalry amongst
competitors, barriers to entry, the bargaining power of suppliers and customers and the
threat of substitutes.
The analysis indicates the foundation construction equipment market is a highly
competitive, mature, cost based industry. What follows is a detailed discussion of the
existing industry's: high rivalry amongst competitors, low barriers to entry, low
bargaining power of suppliers, high bargaining power of customers and the low threat of
conventional substitutes. The analysis provides the influence over attractiveness of each
of the forces, and the influence of a potentially disruptive substitute product, replete with
supporting discussion.
2.2 High Rivalry Amongst Competitors
The foundation construction equipment market is considered highly rivalrous.
This is due in general to product: homogeneity, high availability, long life and the ease of
augmenting short-term supply.
The introduction of the proposed differentiated, high productivity technology will result
in an increase in industry rivalry amongst the existing competitors. The resonant hammer
will cannibalise the existing markets for both impact and conventional vibratory
hammers. This will reduce market share for the incumbents in a market that is already
oversupplied. Thus the existing technology will fight over a decreased market to
maintain a foothold. Essentially a two tiered marketplace will result with the resonant
hammer occupying a broadly differentiated market and the incumbents fighting for a
highly rivalrous market significantly reduced in size.
Lo
w S
up
plie
r B
arg
ain
ing
Po
we
r S
kille
d la
bour
Ab
un
da
nt
Raw
ma
teri
als
(co
mm
od
ity)
Few
em
erg
lng s
ubst
itute
inputs
Low
subst
itute
inputs
L
ow
co
st o
f in
pu
ts
Low
sw
itchin
g c
ost
s fo
r cu
stom
er
Lo
w c
ha
nce
of
forw
ard
in
teg
rati
on
Un
~o
niz
ed
labour
Su
pp
liers
ple
nti
ful 8 f
lexib
le
Lo
w T
hre
at
of
En
try
Modera
te to
low
thre
at
of r
eta
liatio
n
1
Ma
nu
fact
ure
rs w
ith
ove
rca
pa
city
1
H~
gh
new
pro
duct
offering c
ost
? H
~g
h labour
com
ponent I
opport
unity
fo
r lo
w w
age a
reas
to m
anufa
cture
and s
hlp
In
1
Sale
s re
lati
on
sh
ips b
ase
d I
limit
ed
acc
ess
to
ma
rke
t
1
Lo
ng
sa
les
cycle
I lo
ng
term
co
ntr
acts
1
Ple
ntif
ul s
upply
of
use
d w
ork
able
eq
uip
me
nt
?
Str
ong n
etw
ork
effect
s fo
r m
ain
tam
ng fle
et
bra
nds
1
Ass
et
speci
ficity
I N
ot e
as~
ly re
trofit
ted fo
r oth
er
pro
duct
s
T Lo
w M
ES
'r E
ase
of a
ccess
to ln
puts
I ra
w m
ate
r~a
ls and u
n-s
k~
lled
la
bour
1
Sig
nif
ica
nt
ca
pit
al i
nve
stm
en
t
1
Easi
ly c
ople
d d
esl
gns
1 p
roduct
hom
ogeneity
1
Str
on
g b
ran
ds a
nd
bra
nd
re
qu
ire
me
nts
? T
rade b
arr
iers
are
low
erm
g a
nd w
orld
wid
e e
xcess
capaci
ty
Hig
hly
Riv
alr
ou
s
Exi
t B
arr
iers
H~
gh
due to
larg
e in
vest
ment
Ma
nu
factu
rin
g o
verc
ap
aci
ty
Hig
h f~
xe
d
cost
s
Ho
mo
ge
ne
ou
s p
rod
ucts
low
dif
fere
nti
ati
on
Str
ong b
randln
g in
mark
etp
lace
H~
gh
mdust
ry c
once
ntr
atio
n
Indust
ry IS
regio
nally
conce
ntr
ate
d C
R =
85
%
Low
mdust
ry g
row
th w
~th
stable
price
s
Non p
erish
able
ilow
sto
rage c
ost
No r
egula
tory
inte
rventio
n
Mobile
sale
s fo
rce I
dist
ribut
ion
netw
ork
Buyi
ng in
fluence
d b
y B
usi
ness
Cyc
le
Rece
nt i
ndust
ry c
onso
lidatio
n
Ch
ine
se m
ark
et e
ntr
y i
nto
NA
Lo
w T
hre
at
of
Su
bsti
tute
s
& E
qu
ipm
en
t is
ap
plic
ati
on
sp
ecif
ic I
Co
mp
lex
7 Lo
w s
witc
h~
ng co
sts
t P
r~ce
base
d p
urc
hasi
ng I
w m
odera
te tr
ade o
ff
1
lncr
eas~
ngly
rente
d v
s purc
hase
d e
qu
ipm
en
t I hig
h c
ost
of fle
et
t Lo
w p
rice
ela
st~
c~
ty
of
cust
om
ers
1
Ma
nu
factu
rers
ge
ne
rally
pro
vid
e a
ll ty
pe
s o
f e
qu
ipm
en
t
7 N
ew
h~
gh
pro
duct
ivity
eq
uip
me
nt
pre
ferr
ed b
y In
dust
ry
Hig
h C
usto
me
r B
arg
ain
ing
Po
we
r
1
Low
chance
of
back
ward
Inte
gra
tion
7 H
om
og
en
eo
us I
co
mm
od
itis
ed
I l
ow
dif
fere
nti
ate
d
pro
du
ct
line
T L
ow
in
form
ati
on
asym
me
try I
ed
uca
ted
cu
sto
me
rs
T S
ele
ctiv
e s
elli
ng
I cu
sto
me
rs k
no
w a
ll s
up
plie
rs
1
H~
gh
bra
nd e
ffect
and c
ust
om
er
loya
lty
Modera
te s
witc
hin
g c
ost
s
'~i~
~1
i-e
2.
1 P
orte
r's
5 fo
rces
as
appl
ied
to th
e F
o~m
dati
on Con
str~
lcti
on Equ
ipm
ent
Indu
str?
,.
The foundation construction industry is a subset of the heavy construction
industry (as opposed to the housing industry) and experiences growth highly linked to the
business cycle. Heavy construction industry starts are used as a leading economic
indicator and the dollar volume is used as a coincidental indicator to the business cycle.
The foundation construction industry experiences cyclical growth ranging between -3%
to +3 %. Prices are generally stable with short periods of higher than average profitability
during economic upswings when a shortage in bandwidth stimulates profitability.
Typically companies will ride the highs in the cycle, reaping above average profits that
sustain them through the cyclical lows. Equipment expenditures are moderately
stimulated by the brief, cyclical surges in profitability and are generally steady.
High rivalry is due mainly to the relatively homogeneous product offerings in each
of the market segments. Pile driving was invented by the Dutch in the 1500's and has
changed little other than substituting steam or diesel power for the horses and turn-styles
that were once used to raise the hammer ram. Apart from the introduction of powerful
diesel and electric drills and hammers through the middle of the 201h century leaps in
technology have been small and centred upon increasing the efficiency of energy transfer
to the pile through user of new cushion materials or geometries. Innovations create
temporary market advantages and opportunities for differentiation strategies.
Conventional vibratory hammers operate using the same principle of a rotating shaft with
an eccentric mass, differentiated between manufacturers only by features of moderate
value. There exists, however, a constant stream of marginal increments of innovation
within the industry that lead to small productivity improvements. The potential for these
improvements are offset by the complexity of the existing product offerings and the
resulting application specificity.
Delmag of Germany and Berminghammer Foundation Equipment (BFE) of
Hamilton, Ontario managed to maintain a differentiation strategy for many years within
the diesel hammer industry. Delmag was the first high quality diesel impact hammer and
enjoyed first mover advantage, having created a strong reputation for resilience and high
performance with low maintenance. This combination proved valuable to the contractor
and rewarded Delmag with market dominance for several decades.
Other diesel hammer manufacturers caught up with Delmag but not before
Delmag enjoyed ubiquitous market penetration. This first mover advantage led many
contractors to stay within their product line, simplifying their service, training and parts
inventories. Delmag recently fell victim however, to a low cost competitor (to be
described in detail later in this chapter).
Berminghammer has managed to maintain a differentiation strategy within the
diesel hammer market through a combination of technological features and accessory
products that maintain a market niche. It manufactured an impact hammer, which
operates without pile cushions and thus is somewhat more efficient than conventional
diesel impact hammers. In addition it manufactures a versatile lead system that enables
rapid set up of batter pile geometries (piles driven on various angles). This proves to be a
desirable feature in certain application such as railway construction where a limited open
track window (only hours at a time) is available for construction activities.
Despite a high concentration within the marketplace, with a sales CRjvll ratio of
68%, the industry remains highly rivalrous due to the homogeneity of the product
offerings. The high concentration ratio is more indicative of the MES of manufacturing
and distribution as opposed to management strategy.
The industry, in addition to being nationally concentrated, is generally regionally
more concentrated, with dominant equipment distributors within each geographic region.
To the end user the highly regionalised market meets their need for a high level of
proximal support in the form of expertise in use, maintenance and repair. The contractor
desires a fully equipped regional distributor that can provide spare parts or even full
pieces of equipment to bridge their short term needs due to breakdown or short duration
high production schedules.
The reason a highly rivalrous marketplace is maintained in the face of vendor
concentration is the abundant availability of equipment through new purchase, rental or
the used equipment market. This is sustained because the equipment has a high fixed
cost, a relatively long lifetime and is specific to the foundation construction market.
Equipment is relatively expensive to carry for a company due to the high cost of
purchase (between US $125K and US $250K per unit). The equipment is not placed into
service on a continuous basis, with utilization rates typically in the 40 to 70% range. For
a construction company this results in an elevated monthly cost to carry. The competitive
bid structure of the market means that the contractor is limited to what it can charge a
project account in terms of monthly use for the specific equipment. A finite number of
vi i Concentration ratio CR? where the top four manufacturers: APE, ICE, HSPI and MKT occupy 68% of the market share.
contractors and equipment may be sustained for what are generally a limited number of
regional projects,. The overall use and cost to carry must be balanced against the ease
and availability of short-term rental rates for equipment. With the advantage of renting to
any 'successful' bidder on any project the equipment rental companies enjoy a wide
opportunity for utilisation. Their monthly rental rates are balanced against the extra costs
associated with short-term rental, which include higher maintenance costs, frequent repair
and rapid wear.
Foundation construction equipment is fabricated to be highly resilient and lasts 8
to 10 years between major overhauls. The construction workplace is a harsh environment
where reduction of downtime is a dominant equipment feature. This breeds toughness
and longevity of the equipment. Thus the write down on equipment is extended while
realising healthy residual values when the equipment is well maintained. The equipment
may be said to be highly non-perishable. There is a greater risk of obsolescence than
outright equipment failure. This leads to contractors with an inventory of fully
depreciated fully functioning equipment. It also results in an abundant used equipment
market. An additional option for a contractor is to hold onto a depleted piece of
equipment and to rebuild or recondition it when the market turns upwards. Essentially
creating a low cost substitute to rental or purchase of new equipment.
Manufacturing overcapacity in the marketplace exacerbates rivalry. When a sale
is consummated the manufacturer can easily contract out machining needs beyond their
internal capacity and add semi-skilled labour to provide final assembly. The value is in
the design knowledge and access to market. Thus capacity is limited in general by cash
flow and market need. This may be further understood through an analysis of the needs
driven sales cycle.
A typical sales cycle involves a contractor winning a contract that requires an
additional spread of equipment. The key equipment components are rented or leased
through a distributor with an option to purchase. The typical lease to purchase contract
includes the application of a high percentage of the lease payments towards the purchase
of equipment within the first 3 to 6 months. If the project has a sufficient duration or if
the contractor can win a subsequent contract it can create the utilization that would
generate the monthly revenues to justify a purchase. Thus a manufacturer must provide a
piece of equipment in a lease fleet in order to generate a sale. Communication with the
contractor during the lease or rental period can provide advance signalling toward future
equipment needs.
The barriers to exit for rental pool owners, manufacturers and foundation specialty
contractors are relatively high. The equipment is highly market specific and cannot easily
be converted to another application. Suppliers and distributors can slowly enter new
markets but do so generally by selling their fleet at a loss or cannibalising the equipment
while developing the new market. From the manufacturer's perspective equipment
specificity is increasing as opposed to reducing. In many cases the manufacturer is being
forced to make even greater investments to build industry specific base machines and
ancillary equipment in order to offer complete services or bundling to the client.
Similarly it is rare that a contractor end user can cross segment barriers. The value within
contracting lies in the value chain and the personnel's expertise, which tends to be
activity specific. The industry is becoming more and more production based as labour
rates raise and equipment and materials costs (steel or concrete) reduce as a percentage of
overall project cost and risk. This increases the need for operational efficiency and
specialization as a competitive advantage, which further confines the contractor's
personnel and equipment towards specificity.
In reduction of rivalry there exists high network effects and brand loyalty amongst
contractors towards their equipment supplier and or distributor. First mover advantage is
sustained through establishing training of contractor personnel in repair and maintenance
issues, the hard costs of adapting or purchasing specific equipment for use within the
company's fleet and the required investment in spare parts inventory. Contractors will
be highly compelled to buy their next piece of equipment from the same manufacturer to
reduce each of the above, in particular the spare parts inventory. Manufacturers recognize
this and compete to gain the initial sale and then provide service preference to existing
customers.
There are few regulatory interventions influencing equipment decisions other than
safety issues. Safety issues are in fact industry as opposed to regulatory (Workman's
Compensation Board) body lead. The high cost of injuries has lead to high participation
amongst the industry stakeholders in activities and sharing knowledge regarding injury
reduction.
Recent influences on industry rivalry include the emergence of consolidation
within the North American market. Recently a medium sized manufacturer (Vulcan Iron
Works) went out of business and another (J&M Hydraulics Equipment) was purchased
out of receivership by APE. Vulcan's receivership is the result of not keeping up with the
minimum technology and reliability requirements. Similarly MKT equipment is losing
market share and may survive only through the strength of their regional dominance in
the Mississippi Valley adjacent to its manufacturing facility. BFE has suffered perennial
problems with under capitalization, a thin distribution network and an inability to have
equipment in stock at short notice when contractors demand it.
The APE purchase of J & M bears investigation. J & M was a captive
manufacturing entity for ICE from 1976 though to 1999. ICE then contracted some
manufacturing services out to another machine shop in an effort to stimulate competition
and extract cost reduction through J & M. These actions backfired and lead J & M to
sever its relationship with ICE and market its own brand of competitive, but
homogeneous equipment. J & M's good quality, but undifferentiated offerings were
welcomed by the industry due to their recognised relationship with ICE. ICE continued
to manufacture through its new suppliers. J & M over-extended itself financially and
perhaps misunderstood the sales cycle, which resulted in its filing for Chapter 1 I
protection in 2002. Its participation further exacerbated market place overcapacity and
drove down prices. APE bought J & M, recognizing the value of its equipment pool and
strong regional presence in an area where APE was weak. This provided an extension of
APE'S reach into a previously under represented region as well as insight into ICE'S
manufacturing techniques and operational efficiencies.
The emergence of a high quality Chinese impact hammer manufacturer within
North America has created a shift in the structure of the market. Over a decade ago the
Chinese entered into a contract with Delmag, the high quality German manufacturer of
impact hammers, to produce Delmag designs for the Chinese market. The Germans
trained the Chinese in the art of forging, machining and casting of diesel impact
hammers. At the termination of the ten year contract the Chinese kicked out the Germans
and continued to manufacture the hammers under a new name, but maintained the model
designations and exact specifications. The Chinese then slashed the price and began
exporting worldwide. This essentially introduced a low cost, high quality product into the
market, which is interchangeable with a huge established equipment base. Delmag
subsequently went bankrupt and the Chinese hammers are used widely within the industry
where they are creating downward pricing pressure on the other impact hammer
manufacturers. Many of the North American Delmag distributors avoided bankruptcy by
picking up the Chinese hammer lines. Other Chinese manufactures still produce poor
quality vibratory and conventional hammers, but the threat of their flattening learning
curve and ability to copy existing equipment remains a threat to the incumbents.
2.3 Low Barriers to Entry
The physical barriers to entry into manufacturing foundation construction
equipment are considered low. However, the economic barriers to entry should be
regarded as relatively high. This results in an overall low risk of entry by new North
American or European competitors but a moderate to high risk of entry by Chinese or
other potential low cost producer competitors.
Foundation construction equipment is relatively straight forward to manufacture
and in many cases is not prohibitively patent protected. The high labour content, though
skilled, is easily duplicated in low wage regions. The equipment used to fabricate the
equipment, though expensive, is easily converted to the manufacture of equipment for
other industries. This creates a relatively low minimum efficient scale for successful
competition within the market place. In fact a viable model within the industry, and one
that is used by the two major suppliers, is to contract out the bulk of the machining of
equipment parts and to provide only the design drawings, specialty machining and final
assembly. It should be recognised that the knowledge embedded within the design and
drawings is not insignificant. The potential manufacturer has ease of access to inputs,
commoditised raw materials and skilled labour. In fact copying of industry standard
designs is possible as the basic principles of the designs are not patent protected.
There is a relatively low threat of retaliation by those manufacturers in the North
American marketplace. With existing low margins there remains little other than service
support and salesmanship to deter client switching. The low industry profit margins
reduce attractiveness to other potentially low cost suppliers. Existing manufacturers
possess overcapacity and new product offerings are relatively high cost items. Though
the distribution channel provides high value in terms of regional product support, parts
inventory and expertise, their benefits can be considered highly transferable. Independent
equipment suppliers are able to carry any manufacturer's offering, while maintaining their
existing client relationships.
Economically the capital intensive and long period sales cycle deters entry. As
described above the client will generally lease to own the equipment and requires access
to the equipment prior to a commitment to purchase. This forces the distributor or
manufacturer to make a considerable investment in pre-purchase equipment inventory. A
further deterrent to entry is the strong network effects for maintaining fleet brands. This
reduces parts inventory, permits ease of inter-changeability within the fleet, lowers
training costs and increases familiarity amongst field personnel who generally conduct
critical routine maintenance.
The threat of international, low cost producers entering the North American
market is made prevalent by easing trade barriers and the lowering cost of transportation.
This exacerbates worldwide excess capacity.
2.4 Low Bargaining Power of Suppliers
Suppliers to the foundation equipment industry possess little bargaining power.
Labour input consists of fairly skilled machine shop labour, which has become readily
available in most markets. Abundant raw materials are largely commoditised and what
'exotic' inputs are required are provided to the industry globally. This would include
items such as specialty rubber or synthetic dampers, which are priced low enough to deter
substitutes or rivalrous entry of competitors. Should regional or other conditions create
local price pressure there are low switching costs for the manufacturer between machined
or cast steels, or to seek out new suppliers.
As a result there is little forward integration of suppliers into the marketplace.
The most recent example of such an effort failed in the case of J & M Hydraulics,
provided above. It would appear the rivalrous market, long sales cycle and strength of
branding are sufficient to deter forward integration.
2.5 High Bargaining Power of Customers
Customer bargaining power is considered high within the foundation construction
equipment marketplace. Despite the high brand effect and customer loyalty a number of
forces are at work in the customer's favour.
Due to high product homogeneity and availability the customer is easily able to
source equipment at short notice or meet interim needs. The rental market is eager to
provide equipment and carries the necessary ancillary products to accommodate the
contractor's base machine configurations. Thus a contractor is rarely placed in a position
to make a forced commitment or loose an opportunity. The relatively commoditised
equipment permits substitution of competitive and / or ancillary equipment with ease.
This includes such equipment as drive caps, clamps or lead gibs which integrate the
equipment with the base machine or permit driving of the various configurations of piles.
The equipment manufacturers recognised the contractors' need for standardised ancillary
equipment and rather than building in network effects for their own equipment and
creating captive clients they opted to create industry standards which permit the
substitution of various manufacturers' machines with any support equipment
configuration. This was borne out of the original dominant manufacturers, ICE and
Delmag, possessing such significant market share that follow on manufacturers were
forced to copy their geometries in order to achieve market penetration. Thus market entry
came at the expense of captivating future sales. Adding to this the fairly low
differentiation within the market and the customer has a wide range of options both near
and long term.
There remains little information asymmetry within the market place. Contractors
are well educated in the benefits and costs of the various equipment configurations and
features. They have easy access to each manufacturer's products, service and support.
Overall contractor awareness and education is considered high. Selective selling is
difficult as each distributor or supplier will make themselves known to the clients and are
readily available at the frequent trade shows and conventions.
Backward integration of the contractor into equipment manufacturing is rare.
Economies of scale and scope would appear to create enough cost reduction to deter the
do it yourself contractor. Though in many cases, the contractor is sophisticated enough to
fabricate or source their own ancillary equipment and parts. Additionally it is common
for contractors to design and fabricate specialty parts for unique construction geometries
or problems.
The only reduction to customer bargaining power is the presence of strong brand
loyalty. Branding is achieved through the relationship between the contractor and their
immediate regional support network or local distributor. Most contractors have no direct
contact with the manufacturing entity. The client's needs are for fast, high quality onsite
service with access to parts and replacement equipment. Reducing contractor downtime
drives the industry and this is where the opportunity to differentiate by the manufacturers
is capitalised upon. Design features and service are based upon creating operational
efficiency features or situational innovation (project specific equipment geometries or
features) that can save the contractor money either through increased production or
reduced downtime. Once established, this relationship and reliance can become strong
and exploitable. It should be emphasised that production drives the contractor value
chain. Any innovation by the manufacturer that will increase production and reduce
labour costs will be rewarded with high demand.
2.6 Low Threat of Substitutes
The proposed technology not withstanding, there exists a low to moderate threat
of substitutes within the foundation construction equipment industry. The attractiveness
of substitutes is reduced by the production and reliability based purchase decision and the
high risk and high initial cost of new equipment or techniques. The demand for product
reliability creates a Catch 22"iii for new market entrants. Contractors and engineers
demand proven reliability based upon on the job trials and case studies. But a new
entrant has difficulty being accepted because of a lack of a proven record. New purchases
are further deterred by the high capital cost of equipment and the fear of investing in non
accepted technology or a dinosaur.
Often a steep learning curve and even 'inertia' is evident amongst construction
crews who will deter the introduction of new technology. This stems from fear of the
unknown and the potential for loss of working hours. The market place is production
oriented and the potential for production gains must be compelling to entice the
contractor, engineer and owner to take such risk.
Switching costs are moderate as the contractor generally has a high investment
with a single incumbent manufacturer. This creates lower inventory and training costs,
the ability to substitute machines easily and cannibalise older equipment. Switching
manufacturers often means abandoning an existing distributor relationship, which may be
very strong or offer substantial perks.
Regulations can play a role in product or equipment introductions. The
foundation system must be proven to have load capacity and integrity beyond doubt to the
design engineer, owner and permitting or regulatory authorities. Generally this can be
accomplished through onsite testing and a QAIQC program.
Substitutes are encouraged by the appetite in the industry for new products or
techniques that may create productivity gain. In addition the industry model is currently
tending more towards equipment rental as opposed to purchase. This allows introduction
... "I1' Vonegut. Kurt. Catch 22. Yossarian's paradox
into the market with a potentially broader application base if the initial investment hurdle
for the manufacturer may be made. The existing mobile sales force and independent
distribution networks tend to favour new offerings and are eager to support them to
increase sales and create enhanced relationships with their clients. Thus switching costs
are lowered for introduction of a product through an existing distribution network.
2.6.1 Introducing a disruptive substitute
The introduction of a disruptive, patented, high production and versatile
technology within the marketplace would be welcomed and could change the face of the
existing rivalry. The present competitive environment relies mainly upon the quality and
extent of the distribution network to gain market share with relatively homogeneous
products. This represents a capital intensive, long term method to win new business.
Thus shifts in market share are hard won and come about slowly.
The introduction of a highly productive substitute technology through an existing
distribution channel would result in a rapid shift in market share. It is important to note
the shift would only come about by marketing through an existing, established and trusted
distribution network. Without which the perceived risk to production schedule and
capital would be deemed too high to tolerate. Thus significantly retarding the rate of
market acceptance.
It is expected that highly defensive strategjes would be adopted by the incumbents
against the new threat. This would include retaliatory pricing, defamation claims against
the equipment's reliability and productivity and the safety of the foundations installed.
Such antics have been witnessed during the recent introduction of the Chinese fabricated
'Delmag' hammers into North America.
If the new technology was introduced through many or all of the existing
distribution channels the result would be an overall reduction in the cost of foundation
installation and a dramatic reduction in the price of conventional equipment as the new
entrant gained market share. The rate of penetration would depend on a number of
factors including the capitalisation of the new entrant, product pricing, manufacturing
capacity and the availability of purchase capital to the contractors. Eventually the result
would be a reduction in the number of existing conventional equipment manufacturers
and consolidation within the manufacturing portion of the industry value chain. If the
new entrant selected a national distribution channel the result would be a higher level of
consolidation in both the manufacturing and the distribution portions of the industry value
chain. The extent of the consolidation would depend upon both the capitalization of the
new entrant and alliance distributor and the duration and strength of their patents.
2.7 Summary
The attractiveness of the foundation construction equipment industry is found to
be low when using Porter's five forces as the metric. This conclusion is drawn primarily
due to the high competitor rivalry, intensified by overcapacity and product homogeneity
and the high bargaining power of the customer. Combine this with the fact the industry is
mature with low opportunity for sustained growth and there is less attraction for
investment.
The key success factors for the industry remain low cost provision of product, a
strong account base and relationships, a strong distribution network with good field
personnel (expertise and delivery) and finally product innovation. Entry into the market
rcquires a high investment towards the fixed costs of developing a dealer network with
skilled personnel and supply of a rental pool of equipment. Sales are relationship driven
where the customer is wary of being abandoned by a newcomer and the sales cycle is
long. With strong customer bargaining power, exacerbated by a tendering process where
substantial signalling and negotiation is undertaken after the 'close', the seller is forced to
accept eroding margins and thus a low cost model is crucial. Overall the industry remains
unattractive unless a manufacturer can become a significantly low cost producer or is able
to leverage their regional relationships and product innovations.
The attractiveness to the incumbents is less the potential to make high profits than
the opportunity to consolidate the industry and gain market share through consistent good
quality products and developing a strong distribution network. Like many mature
industries there is a consistent need for new replacement product. Here strong branding
and a relationship based sales structure reward the vendor with consistent sales.
However, in this industry there remains significant opportunity for the innovator.
The extreme production driven market and tender based project award system forces
recognition and reward of cost saving innovation. This is borne out in the market where a
history of product introduction and adoption includes such innovations as continuous
flight augur shafts, deep soil mixing and vibrofloatation. Each of these methods has been
introduced in the last two decades as either a product or technique innovation that was
quickly adopted and standardized. The strong industry trade associations, including the
ADSC, DFI, PDCA~X and Geo Institute support and promote innovation within their
industry focus. Thus a reliable, disruptive, protectable technological or equipment
IX Association of Drilled Shaft Contractors, ADSC, Deep Foundation Institute, DFI and Pile Drivers Contractors Association, PDCA
innovation would meet with rapid and ubiquitous acceptance. The price premium for
such an innovation would be balanced against the production cost savings it would
provide and thus there is a great potential for economic profit.
3 INDUSTRY VALUE CHAIN
The foundation construction equipment industry is characterized by capital
intensive equipment used to increase the productive capacity of work crews. High
material and labour costs and exposure to labour risk drive production oriented
techniques and equipment development. The construction industry is driven towards
innovation and increased efficiency by the low tender system for awarding contracts.
Survival in the industry is dependent upon lowering costs through increasing production,
minimizing risk and efficiently conducting the work.
The result is a lean industry that demands and rewards innovation towards high
production, labour minimizing equipment that is reliable and economically priced. These
demands mould the equipment supply industry value chain8 into the seven competencies
illustrated in Figure 3.1. The width of each competency indicates its importance within
the value chain. The figure depicts RT17s participation in yellow. The competencies
supplied by a distribution network company (or group of companies) are shown in
orange. The anticipated partnership between RTI and the distribution company is
depicted through the fading of RTI yellow into orange. The mixing of colours accurately
portrays the anticipated shared involvement, overlapping and intimate relationship
between the companies. The non key success factors are shown in blue and include
suppliers, fabrication, assembly and construction.
Of the seven competencies R & D and distribution, in particular sales and
servicing are the historical key core competencies within the industry. Recently,
marketing and supply of ancillary equipment have emerged as important and potentially
differentiating core competencies.
Industry Value Chain Deep Foundation Construction Equipment
Design &
Special Equip- ment
Marketing
Resonance Technology International lnc. Distribution Partner
XFigure 3.1 Industry Value Chain
Value is presently added to foundation equipment products through the
distribution channel and servicing of the equipment. There exists strong regional product
domination, which is the result of a local, superior distributor with excellence in sales,
site service commitment and personnel. Contractors value excellence in service because
they make money by maintaining production and avoiding delays and breakdowns. When
an equipment problem occurs they require immediate and high quality response in terms
of on site service, parts supply and repair. This will get them back up and running and
avoid crew delays and added costs. Time becomes the major risk factor for contractors
due to the exposure it creates to labour and equipment cost over runs. Materials prices
are relatively constant and contracts are written to permit extra charges or credits for
Adapted from MBA 607 Business Strategy class notes, Prof Ed Bukszar
materials over or under runs. However, labour and rental equipment costs expose
contractors to delays and significant unplanned charges. The manufacturer who provides
dependable equipment and rapid, high quality service is rewarded by high rental and sales
figures.
Risk mitigation is of primary concern amongst contractors. It has been recognized
that avoiding bad jobs is a key success factor for construction firms. The risk of a poor,
insolvent or unreliable distributor creates very real exposure for contractors. They could
end up with non standard or obsolete equipment that the owner's representative engineers
are not familiar or comfortable with. They risk not having easy or timely access to spare
parts at reasonable pricing. The manufacturer may become insolvent and they lose
technical support or lobbying with the major owners like the Federal Highways
Administration (FHWA) or the local state or provincial Departments of Transportation
(DOT'S). Any of these conditions could lead to contractors owning dinosaurs which they
are saddled with for 8 to 10 years until they can recover their investment and repurchase
state of the art equipment.
The deep foundation construction industry experiences a capital intensive, long
period sales cycle. Contractors will typically lease equipment for a period of 3 to 9
months before committing to purchase. The lease contract will generally provide for a
high percentage of the lease payments to be committed as a down payment on the
machine if a purchase option is exercised. Typical contractors will be awarded a job that
lasts for 2 to 4 months for which they will require an additional piece of equipment.
Contractors will enter a lease to purchase arrangement with the hope that following the
current project they can acquire a follow on project to generate another 2 to 4 months of
rental. At the culmination of the second project contractors can accumulate as much as
30% of the cost of the equipment applied from the lease payments as a down payment on
the equipment. Effectively contractors can finance a significant portion of the equipment
purchase through the jobs they have completed and the purchase decision becomes much
easier to commit to. Thus contractors demand access to equipment prior to the
commitment to purchase, forcing the distributor or manufacturer to make a considerable
capital investment in pre-purchase equipment inventory. This brings about a requirement
for extensive financial capacity for the manufacturer. Each of the two largest
manufacturers have new or low hour equipment inventories available for lease worth over
$20 million, or 200% of their annual lease revenues.
These two factors: distribution excellence and equipment availability through pre
purchase lease are to be considered the major factors in accelerating buyer readiness and
creating sales opportunities. In particular the relationship developed between the local
distributors and their contractors is the strongest bond formed in the industry.
Contractors must rely on distributors to go the extra mile to deliver a needed part in the
middle of the night, to source equipment or juggle schedules to meet critical site needs or
provide access to new technologies that provide a slight edge. These relationships require
time and history to develop. They transcend the company association and translate
directly to the personal relationships that develop. Often personnel changes at companies
result in changes in the major equipment supplier to maintain these personal
relationships. The result is that distributorships are not built easily, quickly or
inexpensively, but requires time and proven performance in critical situations where
conflict and commitment exposing decisions are required. Thus building a
distributorship requires time, commitment and extensive financing for personnel, parts
and long term presence in the market place in addition to the capital investment in enough
equipment to ensure availability.
Research and development, design and testing create an opportunity for
differentiation within what is today a largely commoditised industry. Generally the
products are homogeneous with little product differentiation between the various types of
hammers. Impact hammers, either drop, diesel or hydraulic, differ somewhat with respect
to energy transfer and general application, but do not differ greatly between
manufacturers. Within each segment one or two manufacturers invest in creating a
differentiated product based upon technology. The extent of the differentiation is limited
and results in product superiority only within in a niche market. For example within the
impact hammer market subtle differences between manufacturers result in slight
advantages in specific applications. IHC Hydrohammer manufactures a high end
hydraulic hammer with a nitrogen charged compression chamber that permits increased
driving performance on battered (angled) piling. All impact hammers rely upon gravity
to accelerate the ram downward to strike the pile and thus efficiency is reduced when the
pile is driven on a sharp angle from the vertical or when piles are driven underwater. The
use of a compression chamber to accelerate the ram downwards helps maintain efficiency
in these situations. The compromise is that the hammer becomes much heavier, both due
to the extra parts and the need for a heavy hammer body to react against. Severely
battered piles are rare, as are underwater applications and thus the applications represent
only a niche market.
Until recently, marketing of foundation equipment was undertaken in a relatively
blasi fashion, with simple trade journal adds depicting equipment, specifications and the
odd client testimonial. In 1998 American Piledriving Equipment (APE) began to
leverage its marketing campaign to garner greater customer retention. This was achieved
by placing higher impact advertisements that made bold production and achievement
claims (driving deeper or into more difficult soils) based upon superior equipment
performance, specifications and reliability. These advertisements displayed the APE
equipment in spectacular settings conducting specialized work in intriguing applications.
The advertisements emphasized APE innovations and 'firsts' in terms of achievements
and applications. APE targeted industry trade shows as venues for delivering papers
detailing and extolling product virtues, new accomplishments and applications and often
to create controversy. In addition the shows were used for demonstrations, 'drive offs'
against competitors and roll outs of new products. These antics caught the competition
off guard and left them scrambling for creative and copy content. To date they have
never really caught up.
Fabrication, assembly and supply of ancillary equipment are secondary industry
competencies. They are secondary in that they enhance the company's position in the
marketplace but do not define it. Manufacturers often outsource fabrication of the
equipment components. The equipment needed to cut, weld and machine the components
are easily adapted to other manufacturing applications and thus the steel fabrication shops
(companies that assemble and weld steel into components) and machine shops
(companies that cut steel on lathes or milling machines to fashion components) can
increase efficiencies by taking on higher volumes thus increasing the minimum efficient
scale of production. Generally the foundation equipment manufacturer will fabricate only
a small portion of special components for its products. The competency will lie in its
ability to organize and assemble the components into the final product. Where possible it
will create purchasing, coordination and just in time (JIT) inventory competencies.
Supply of ancillary equipment represents an opportunity to provide a complete or
bundled service to the contractor, but does not create a necessary benefit. The contractor
is able to source ancillary equipment from other suppliers without suffering from
compatibility issues or added costs for modifications. Relatively homogenized base
equipment permits substitution of competitive and or ancillary equipment with ease. This
includes such equipment as drive caps, clamps, leads or lead gibs which integrate the
equipment with the base machine or permit driving various configurations of piles.
However, most equipment suppliers have discovered the benefit of creating bundling
opportunities to increase sales and lock in client patronage. Equipment manufacturers
recognized the contractor's need for standardized ancillary equipment and rather than
building in network effects for its own equipment to create captive clients in the future it
opted to create industry standards which permit substitution of any manufacturers'
machines with any support equipment configuration.
Suppliers and materials are relatively abundant and homogeneous in the
foundation equipment manufacturing industry. The steels and other materials used are
readily available worldwide at consistent pricing, providing no real advantage to any one
producer.
The addition of construction activities to a manufacturer's value chain represents
a compelling opportunity. Any manufacturer that creates an innovative, cost efficient
technology could reap great benefits in the construction marketplace if the technology
could be protected either through patents or non-disclosed processes. Many
manufacturers have taken advantage of this model and created construction competence.
These include Berminghammer of Canada, Bauer of Germany and SMW Seiko of Japan.
For example SMW Seiko developed deep soil mixing technology that enabled the
improvement of soft soils deep below a proposed structure. Improving the soil reduces
the potential for differential or large settlements of the structure eliminating the need for
piling at greater cost. Rather than sell the equipment to a limited number of contractors,
SMW Seiko determined the most profitable model was to create a construction company
and provide deep mixing services at great profit.
Generally the manufacturing arm and construction arm are separated as divisions,
allowing sale of the technology into distant, non competing geographical regions.
Eventually the benefit of the innovation expires or is copied and the competitive
advantage wanes, leaving the company to compete on an even footing. The problem with
the model lies in the very different competencies required by manufacturing and
construction.
3.1 Exploring the Company Value Chain
There exist a number of options for RTI to select in determining its optimum
value chain. To date RTI possesses a well protected, disruptive product that has the
potential to significantly alter the existing industry value chain. In the past R & D has
played a minor role in the industry providing generally incremental leaps in technology.
With the introduction of patented disruptive technology the importance of product
technology will increase significantly. The question is will the increase be sustainable?
If it is sustainable RTI can survive as an R & D based manufacturer of innovative
foundation equipment products and maintain a strong market presence. If RTI's R & D
advantage proves to be fragile, the technology cannot be improved upon or is easily
copied then RTI will possess no sustainable advantage and lose market share to those
companies that have a strong distribution network.
This leaves RTI with three options for exploration of an optimum value chain: 1 .
Manufacture equipment and distribute through its own, or in partnership with an existing
distribution network, 2, Manufacture equipment and sell to all distributors who then
market, sell and support the equipment to the end user, and 3. Manufacture the equipment
and use it as an exclusive contractor or through licensure to non competing contractors
worldwide. This chapter will analyse the merits and drawbacks of these options.
3.1.1 Option I : Distribution through a single channel
Manufacturing equipment and distributing through its own or in partnership with
an existing distribution network will offer high rewards and high determination of
product placement and positioning in the marketplace. This option uses the short term
value that the new technology creates in the value chain while maintaining the long term,
dominant power of the distribution channel in the company value chain. Here RTI will
accept a strategy to subordinate itself to the distribution channel leveraging the value of
the technology to either create its own distribution channel or participate in some manner
in an existing partnered distribution channel. The first option, to create its own channel,
is considered possible if the technology is disruptive and the intellectual property (IP) is
strong, with good opportunity for enhancement and poor opportunity for competition in
the short and medium term (up to 12 years). At this stage of the company's development
this option is considered unrealistic. The existing 1P expires in the USA in late 2009.
Though there is good opportunity for patent enhancement in the pile driving space i t has
yet to be realised. In addition, supporting and protecting the IP in the 'land of litigation'
(USA) which is the dominant market, will be prohibitively expensive. With the
inevitable outcome that a competitor will find a way around the IP, either partially or
completely, will pennit some form of competition within 6 to 8 years. Building a
reputable distribution network with a well stocked equipment pool and competent staff
will require 8 to 10 years of well funded effort.
Marketing and distributing the product through an existing industry leading
distribution channel will permit more rapid penetration of the product into the
marketplace and allow RTI to concentrate its effort and capital towards creating an adept
manufacturing and sales support business. With technology that is disruptive and strong
IP RTI can leverage an equity position in the distribution channel that will protect it from
becoming marginalized over the long term.
Under this arrangement RTI will need to develop strong branding and product
support skills. Branding of RTI will protect the company against competition when it
enters the market in the medium term. The comfort level of engineers and contractors
will be tied not only to the distributor but also to the RTI product. Co-branding may offer
strength to both RTI and the distribution partner in the near term, further cementing their
relationship in the longer term when competition will enter the market. Initially RTI will
benefit from the distributor's brand, lending credibility to the new product. Over the
longer term RTI will lend value to the distributor's brand though continuity, quality and
trust based upon the years of successful projects completed with the equipment. A truly
symbiotic relationship will benefit RTI as it may reduce the chance of the distribution
from backward engineering the product and severing their relationship. Strong product
support skills in concert with the distribution partner will further engender both
relationships and protect RTI from future competition. It will also provide improved
access to the customer, their knowledge and their needs for development of future RTI
products.
In addition selling to a captive, partnered distributor should reduce RTI's capital
requirements through lowering accounts receivable duration and risk. This will reduce
the dependency of RTI upon the capitalisation aspect of the value chain.
3.1.2 Option 2: Distribution through multiple channels
Manufacturing equipment for sale through all distributors represents the most
straightforward, but most capital intensive method of creating market entry. Under this
scenario the power of the distributor in the value chain is undermined through head to
head competition. Since RTI sells to all distributors it doesn't matter to RTI or the
industry which distributor is superior in any region. The customer, or RTI, simply
increases sales for the most competent distributor in any region. Competition keeps the
distributor honest and aggressive in the market. The value chain changes such that the
previously dominant sales, marketing customer service elements become secondary to
RT17s superior technology until its intellectual property erodes. RTI's core competency9
remains in the technology and R&D domain but shifts to include branding, product
support and production. Of these branding becomes the most important. With no
exclusivity between RTI and the distributors, the distributor will be free to adopt
competing technology when it becomes available. Thus RTI must seek strong brand
presence in the industry. The RTI name must become omnipotent within the industry and
the only name thought of with reference to resonant or high frequency hammers. The
company may consider changing its name to 'Resonant Hammer Corp.' This, with
proper promotional effort by RTI, would result in the industry adopting a technology
name synonymous and interchangeable with the name of the company providing the
product. Thus an engineer would specify a 'resonant hammer' for a project such as 'a
Resonant Hammer Corp Model X'. Resonant Hammer Corp would become the 'Kleenex
tissue' of the foundation equipment market.
Product support competency would increase under this scenario as it would
represent RTI's only access to the customer and to differentiate itself from the
competition amongst otherwise 'un-devoted distributors.' RTI must provide quality
products with quality service and technology support to establish devotion amongst the
end user. Ultimately the distributor will benefit and thus a stronger relationship with the
channel will be nurtured. This will be enhanced by the strong product development
competency of RTI.. Solving contractor needs by producing new niche products and
customised equipment for unique projects will assist in wrestling some of the relationship
bonds away from the distributor and into the hands of RTI.
On the production side, RTI will need to develop high competencies in order to
meet the product demand. The main hurdles here are reducing costs and financing. The
two are inversely related, in that the more competent RTI becomes at reducing the cost of
production the lower their need for cash will be. Despite great competence, RTI will
require tremendous capital for industry penetrating growth. As a fast growing highly
profitable company, cash will be rapidly consumed in funding expanding production.
Thus simultaneous with the cash crisis the need for high production will require
operations expertise to be brought into the firm that does not presently exist.
Selling through all distributors represents the greatest near term potential to
capitalise on the strength of the IP and to create high sales. However, eliminating the
value of the distribution channel eliminates the opportunity for RTI to create a strong
relationship with the distributor. With the inevitable entry of competition, RTI's foothold
is reduced to its reputation and brand and what strength they have built into the first
mover advantage.
3.1.3 Option 3: Extension of the value chain to include contracting services
The company value chain for manufacturing equipment for internal use as a
contract service provider would maintain and capitalise on the technology and R&D
dominance of RTI but now would shift to include construction competency. This strategy
again eliminates the present power of the distribution channel, however, at the expense of
adding a significant and challenging core competency, that of construction expertise.
The competencies of manufacturing and construction may outwardly appear
similar in terms of the need for both scheduling and production competence, but the root
of the principles upon which they are based are very different. In the manufacturing
realm the competency is centred on orchestration of suppliers and processes, checking,
recording and streamlining processes. The talent is in tearing apart and scrutinising the
best possible processes, finding the least number of steps and optimising the ordering of a
process to gain efficiency. Every process is stopped and studied in a search for the best
solution. Special tools and templates are created and economy of movement is strived for
as the repetitive process dominates.
In construction the same scheduling and production orientation are present but the
principles are based upon quick innovation and adaptation. Obstacles to production are
not studied, they are overcome or avoided where the value is found in 'on the spot
solutions' and conflict avoidance. In construction the processes are similar but rarely the
same. Solutions are bridging and stop gap. The most valuable competence is the ability
to foresee the minor problems that continuously interfere with site coordination and
production. This results in a jack of all trades mentality using on the spot innovation not
the specialisation of manufacturing.
Though the competencies appear similar in many respects they stem from
different roots. The manufacturer is the precise perfectionist and the contractor the
adaptive innovator. In many ways the competencies of the manufacturing R&D team is
closer to that of the contractor than the manufacturer's production side. This may give
rise to the frequent conflict that occurs in many manufacturing cultures between R & D
and production.
Thus to follow this strategy will require the addition of a new core competency to
the RTI management team. In addition a huge capital undertaking will be required to
acquire the necessary equipment and infrastructure to enter the market at the capacity
required to take full advantage of RTI's technology. These needs and constraints would
lend themselves to a partnership arrangement where RTI would gain an equity position in
exchange for the exclusive use of the equipment by the contractor within its geographical
region of influence.
4 STRATEGIC ANALYSIS
4.1 Strategic Alternatives
Analysis of the three alternatives presented in the last chapter may be approached
with respect to the short and long term goals of the company. The short term goal is to
gain a corporate foothold by applying the technology successfully within a profitable
industry. Having established credibility and cash flow the company can then examine the
long term opportunities and implement the most profitable strategy. The long term
strategy will take one of two paths: First, the pile driving market may be alluring for
permanent residence by RTI. Second, the attractiveness of alternative applications may
be greater and give rise to liquidating the value created in the pile driving space for
funding of the alternative opportunities. Two strategic alternatives are available to RTI to
exploit the value chain. These options include 1. Develop the technology in the present
application and establish some form of delivery participation either in the distribution
channel, contracting or a strong brand. 2. Develop the technology in the present
application and fund the establishment of an R&D pipeline to develop products for
alternative applications. 10
4.2 Near Term Strategy, Establishing a Business Foothold
Manufacturing equipment for sale or distribution by others represents a
straightforward but capital intensive method of getting the technology to market. In
addition it is recognised as having the potential to produce the greatest, immediate market
penetration for the product. This strategy could take a number forms, from rapid
penetration entry to slow or rapid skimming.
4.2.1 Rapid Penetration
Using a rapid penetration strategy RTI would sell to all distributors and saturate
the market as quickly as possible. The entry would involve high advertising
expenditures, high profile 'drive offs' demonstrating the equipment's superior production
capability against conventional equipment and pricing the product attractively for key or
high profile construction projects that will attract industry editorials. Using multiple
distributors will ensure lean distributor mark-ups and aggressive pricing flowing through
to the customer. Establishing market saturation RTI would then enjoy 1" mover
advantage and strong repurchase and parts resale markets. This method would rapidly
erode RTI's profit margin as the early adopters quickly gave way to the mass market
buyers.
This strategy would be suitable if access to large pools of capital became
available, the potential for upgrades in the product were strong, there was a good
accessories equipment market or the product experienced some high consumable that RTI
could control the distribution and sale of. This strategy becomes more attractive if there
is little chance of patent enhancement, the intellectual property is not strong or RTI
cannot develop tacit knowledge in the manufacture or operating algorithm of the product.
The approach does offer the opportunity to create manufacturing and distributor support
core competencies that can prove to be valuable and difficult to imitate. The strategy
undermines the power of the distribution channel, but only in the short term. In this
scenario branding and the power of 1" mover advantage will determine the long term
success of the company.
4.2.2 Rapid Skimming
The rapid skimming model would be similar to the rapid penetration model but
would price the equipment to appeal to the early adopters and unique or high profile
constluction market where cost becomes less of a determining factor in the equipment
decision. RTI would sell through one or more distributors controlling the market price to
maintain high margins.
Marketing and sales expenditures would be high but geared towards the quality
market niche. Thus access to capital is important to exercise this model. Marketing and
sales would be managed jointly with the distribution companies providing the majority of
the personnel and infrastructure. Sales would initially be to the distributors' key clients
using high profile projects to gain notoriety and editorial coverage. Advertising would
initially be through the distributors' mailing lists and existing print efforts in the trade
publications. Eventually competition will emerge to challenge RTI's dominance. RTI
will be forced to become the low cost provider or occupy the high quality niche with
reduced capacity and revenues. Thus the importance of creating strong partnerships with
the distribution channel and sharing in the brand recognition will be important. The key
component in the company and industry value chain will lie in the distribution channel
and the relationship held with the clients.
This approach becomes attractive with moderate strength IP, good enhancement
capacity or if a high tacit knowledge component exists with the technology. This method
of market entry becomes susceptible to competition as the high margins attract
competitors.
4.2.3 Slow Skimming
The slow skimming strategy could take two forms for RTI. The first would be
through an exclusive distribution relationship with a single incumbent distributor in each
of the major markets. The second could be in the form of extending the value chain to
include offering exclusive contracting services using the technology.
In the exclusive distribution model RTI would sell through a single distributor
maintaining good margins for a longer period of time. The distributor would ideally be
set up as a partnership whereby RTI would acquire a minority share of the distributor over
time.
The importance of creating a partnership and participation within the distribution
and sharing in the brand recognition cannot be over emphasized. Without a partnership
RTI will be exposed to erosion of their intellectual property value through infringement
of their patents and eventually imitation when the patents expire. With out a partnership
in the distribution channel or brand recognition RTI will be left with reduced value. In
fact the existing distributor would probably become their most rivalrous competitor since
they own the channel, the relationships, intimate product knowledge and half the brand
value.
The slow skimming strategy becomes attractive with high strength of the
intellectual property and high visibility of the product performance and productive value.
The high visibility of product value will engender attractive terms with the distributor for
creating a partnership. However the real strength in the value chain will remain with the
distribution channel.
The final option using the slow skimming strategy would favour expanding the
value chain to include construction services. In this case the equipment, or services,
would be priced to achieve a very high margin, near the upper limit of the market's price
tolerance. This would result in a clientele of early adopters and technology leaders within
the industry. The equipment (or services) would still provide high production value to
attain overall project savings through either pure cost or schedule. The equipment would
be used for special projects and where other constraints increased its attractiveness. For
this strategy a partnership agreement with a distributor, or contractor, would again be
desirable but not essential.
The slow skimming strategy is well suited for technology with high strength, long
lasting intellectual property or when the potential for patent enhancement is strong.
Partnering protects the technology and decreases the capital investment and infrastructure
required for exploitation. In this instance it is the power of the technology that dominates
the value chain.
A slow penetration strategy does not rely on high investment capital and can
accommodate slow organic growth of the company and clientele.
For this analysis the rapid penetration and slow skimming models will be
analysed. The rapid skimming model is not because it has similar demands for capital as
the rapid penetration model, without the benefit of first mover advantage and offers few
benefits over the slow skimming.
4.3 Long Term Strategic Focus: Leveraging Value
The long term strategy to be adopted by RTI is highly dependent upon the quality
of the intellectual property embodied within the patents and the license. RTI presently
holds a perpetual, worldwide jurisdictional license for the use of the patent in all
applications relating to the geotechnical, drilling and construction industries. The patent
is written to govern two embodiments of the technology. This includes the mechanism
itself, which includes an elegantly simple internal valve geometry that has the effect of
minimising the inefficiencies of reversing hydraulic flow in a high speed system. The
second embodiment involves the manner in which the machine and its controlling
electronics can monitor and optimise its operational frequency to match the resonant
frequency of the system it is driving. This second embodiment holds great value because
it is crucial to the safe and efficient operation of the equipment. In addition it identifies
and leaves available an avenue for enhancement and extension of the patent life. Given
the fragility of intellectual property the potential for its eclipse is recognised and
accounted for in the long term strategies presented.
Given the successful implementation of a short term strategy and the gaining of
corporate purchase within the foundation construction equipment industry, the
implementation of a long term strategy is required. The strategy will adopt one or both of
two alternatives.
If the foundation construction equipment market proves to be profitable with a
sustainable competitive advantage attained through either technological advancement and
superior products or first mover advantage and excellence in distribution, then RTI may
maintain its participation in the space. The long term success of that participation will of
course rest upon the quality of the competitive advantage. Ultimately the advantage of
the present configuration of the technology will expire and other manufacturers will enter
the space. This will result in price erosion and force RTI to compete on price or
differentiation in the market. The differentiation strategy should be more attractive to
RTI as it will have placed the majority of equipment in the marketplace by this time and
gained first mover advantage. Provided it has maintained product quality, a reputation for
equipment longevity and good service RTI can maintain differentiation based on quality.
First mover advantage has great value in the industry for a number of reasons.
The industry will be accustomed to RTI equipment and have developed a large data base
of projects. Any new entrant will be forced to prove the integrity of foundations installed
with its equipment. A construction client that owns several RTI machines can gain
efficiencies and redundancy through buying new RTI equipment. This will reduce
inventory for spare parts and accessory equipment, decrease training of personnel and
provide access to spare parts through cannibalising old machines. On an operational
basis if the client is executing a contract with an RTI machine and the equipment breaks
down it can easily replace the equipment with another RTI machine. If the contractor
uses a competitor's machine it will have to provide additional proof testing to ensure the
foundations are being installed in a similar manner.
Branding is a valuable feature of the first mover advantage. The strong
association between the product name and the technology outlives the introduction of
competitive equipment. The trust and comfort level associated with the brand is strong
especially amongst risk averse engineers. The advantage of branding is reinforced with
the strength the distribution channel gains as a first mover. Trained service personnel,
customer relationships and a large equipment inventory represent a huge advantage over a
rival entering the market. The new entrant must expend large sums to compete
effectively with an entrenched incumbent. The strength of first mover in the distribution
channel is further reinforced by the strategy endorsed in this study. The strength of the
existing channel and the expense of creating a competitive channel are deemed too great
to be undertaken and a partnership approach is recommended.
The value of the distribution channel will grow under the long term scenario. A
quality sales and service channel is essential for a differentiated, quality product. Quality
is measured in part by the problem free operating hours of the equipment. To achieve
high operating hours the distribution channel will need to conduct frequent maintenance
on the equipment and perform emergency service during breakdowns. From time to time
the contractor will require an additional spread of equipment and will rely upon the
distributor to provide this 'bridge7 equipment. These activities serve to strengthen the
personal relationship between the contractor client and the distributor. The value of this
relationship is judged to offer the strongest competitive advantage in the industry. Thus
RTI must create, at a minimum, ownership of part of this relationship.
Ownership of the distribution channel relationship could take many forms. RTI
could supply extensive sales support to the distribution channel with a team of RTI
personnel using technical support representatives. The RTI personnel would accompany
the distributor on all calls to major accounts and for equipment needs relating to
prominent projects. The RTI team would become an often used resource for technical
support, special design features or equipment and to assist in the preparation of technical
submissions. Through heavy branding efforts the RTI name can become synonymous
with the distribution channel and thereby participate in the relationship. The brand would
be created by extensive use of the logo on the equipment and literature circulated about
the product, both technical and sales literature. In this manner an RTI binder would sit on
the shelf of every design engineer in the market, providing the benchmark for foundation
construction technical design and performance data.
This leads to discussion of an important industry trend. Engineers' and owners'
representatives sometimes specify needs in terms of branded products. For example, in
the fastener trade (fastening bolts into existing structures) the HILTI Company has been
both the innovator and the quality supplier of product for the past 25 years or more. In
specifications, when engineers require a given level of performance, as opposed to
specifying pull out strength, shear strength, geometry or materials and workmanship
specifications, they will name a specific HILTI product. They imply or often state that an
equivalent product may be substituted for the HILTI product, but the contractor will be
left with the burden of proof of equivalence, which is effectively another deterrent from
using a substitute product. As a result the HILTI brand and its product line have become
ubiquitous in the fastener industry. RTI must strive to create similar brand omnipotence
in the deep foundation construction industry.
Alternatively or coincidentally, RTI could increase its presence in the distribution
channel by either developing its own distribution channel or partnering through purchase
of an existing distribution channel. With increased marketing efforts and brand
recognition there would be value to an existing distribution partner to adopt the RTI logo
and acronym within its name and on its literature.
If the market has been successfully penetrated and growth or margins are
beginning to decline then RTI should liquidate its holding within the space and look for
other promising applications of the technology. As discussed, there remain a number of
promising applications including: oil and gas services (conductor pipe and pile
installation, stuck pipe freeing, production well scale cleaning and potentially drilling),
soil densification (roller and plate compactors), mine tailings treatments (precipitation of
solutes, tailings dam consolidation), concrete and rock breaking and ceramic brick
manufacturing (densifying the base materials prior to firing). Following the
establishment of a successful manufacturing business in deep foundation construction
equipment, cash flow would be directed at exploring one or a number of these alternative
applications. The most probable first application will be the oil and gas services industry.
Applications to conductor pipe and offshore pile driving are very similar to those for
conventional pile driving. A follow on application would be soil densification. The
potential for the technology to improve on existing techniques within this industry is
strong. The market potential is enormous (over USA $ 1 billion annually) and there is the
opportunity for patent enhancement through the introduction of external electronics to
monitor ground behaviour during operation. Because the ground and the machine are not
coupled (attached) it is difficult to determine when resonance is attained through the
existing patented monitoring system. Thus an external monitoring system will be used to
establish soil response and hence densification.
4.4 Key Success Factors
The primary objective of this study is to identify and evaluate the optimal strategic
options for Resonance Technology International Inc. A vital component in evaluation of
the optimal strategy will be to identify and discuss the key factors necessary for
successful implementation of the technology. There are two categories of factors that are
vital for success, they are external (customer) focused and internal (organisational)
focused.
The key customer factors are assumed to be similar for both the identified space
(pile driving) and the long term strategy of expanded applications. This is because the
factors required for successful implementation into most industrialised markets are likely
to be similar. The key external success factors in the pile driving space are access to
market, customer service, market acceptance and pricing. To a lesser degree branding,
distribution breadth and customisation will influence the RTI product. Branding is, at
this point, a lesser key success factor but will grow with market acceptance and the entry
of competition into the space.
The key internal success factors are the strength of the intellectual property,
engineering and management, profitability, cash flow, financing and human resources.
Criteria F Distribution Breadth Distribution Pricing Customisation Market Acceptance
Internal Factors L Engineering Management Human Resources Financing Cash Flow Profitability Synergy w l Long Term
Total
- Criteria Weight -
15 8 17 14 8 15 13 - 90 - -
20 18 15 10 7 10 14 16
Short Term Goals
Table 4.1 Ternplate for the AHP model
The Analytical Hierarchy Process (AHP) model provides a comprehensive
method to asses the key success factors for a given strategy Table 4.1 provides a template
for the comparison of the key external and internal success factors for the strategies
outlined. In the model the criteria weight for the key success factors is determined on the
basis of the perceived importance of each factor to the marketplace with a limited total
value of total criteria weight (90). The weighting of each factor reflects its relative
importance, ranking and proportional value. Here the importance of the distribution
channel is deemed to be twice as important as customisation. For each strategic
alternative the weighting is given on a scale of 1 to 10 with each value indicating the
combination the need and ability of RTI to provide this key factor. For example under
the rapid skimming strategy distribution is deemed to be of the greatest importance and
RTI's ability to provide a strong distribution channel (albeit through partnering) is
deemed to be good, whereas customisation is deemed to be of little importance even
though RTI's capacity to provide customised products is high.
In terms of internal factors the criteria weight is determined by the strength of the
resources of the firm. For example the strength of the IP is deemed to be very high,
whereas the strength of the ability of the firm to provide financing is low, approximately
113. The rating for each strategic alternative is given on a scale of 1-10 based upon the
importance and need for each factor.
4.4.1 External Success Factors
Access to market and customer service have been identified as key factors in the
exploitation of the pile driving equipment market. Evans et all' established that the
American market places a high reliance on long term, quality relationships. As a result
using an established distribution channel in the foundation construction equipment space
will offer rapid and widespread access to the market for RTI. Using a high quality
network with established relationships and a reputation for service and product support
will create the greatest client comfort when enticing them to try a new product. The
perceived 'higher risk' of new technology will only be taken when the contractor feels
assured that the distributor will support the equipment and initially share some of the risk
associated with the trial. This risk would come in the form of waiving the rental fees if
the product doesn't perform and providing additional or replacement equipment to assist
in making up lost schedule.
Market acceptance and pricing are integrated success factors that influence the
willingness of the client to reach the buying decision. The contractor does not want to
risk purchasing a future 'dinosaur' that they have difficulty using on projects where
regulations or acceptance by an engineering representative dictates product use. Thus
RTI must prove the product to the regulatory bodies such as the FHWA or the local state
and provincial DOT'S (Dept. of Transportation) to gain acceptance. The industry
associations such as the DFI and the ADSC are active supporters of new technology and
trusted by the regulatory authorities. These associations will prove to be willing allies in
gaining acceptance for the technology. This burden of proof will amount to driving piles
on construction sites along side conventional equipment and conducting load tests, or pile
driving analysis (PDA)x'.
PDA consists of measuring the strain and acceleration of the pile during a hammer impact. The time histories of the impulse are analysed to provide a rough estimate of pile static capacity. PDA is a commonly used QNQC tool in the industry.
It is important to note the influence within the industry of Goble, Rauche and
Likins Inc. (GRL), the manufacturer and dominant service provider of PDA. This
company enjoys product dominance in the American marketplace and strong working
relationships with the FHWA, the active DOT'S, other prominent public owners and
consulting engineers. Endorsement of resonant hammer technology by GRL will be an
important milestone in market acceptance. More importantly, avoiding rejection of the
technology by GRL will be paramount. If GRL interprets the use of the technology as a
threat to its business it will react in a very defensive manner. GRL's influence with the
key proponents in the marketplace will be substantial. A negative endorsement by GRL
will jeopardize success of the product. Thus it is important that GRL personnel be
approached during the field testing and proving stage as an ally with the potential to
expand its product line to include testing of 'resonant driven piling.'
Product pricing is an issue for RTI because of the strong signal it sends to the
market. The market place is accustomed to rental and lease to purchase models of highly
priced equipment. The value provided by the high production capacity of the equipment
will allow RTI to command a high premium, but the perception of that premium in the
marketplace will be difficult to gauge and set properly. Contractors are savvy and know
the cost of machining and fabrication of equipment. If they perceive the price to be too
high it will create resentment and instil a desire to create a substitute to RTI on the supply
side.
Branding will not be critical for successful market entry. With new technology
the equipment reliability and its productive capability will dominate perception in the
marketplace. The buyer decision will be more influenced by the support network
provided by the distributor. Only in the long term will brand provide value and be critical
for RTI's success.
Distribution breadth will not be critical for RTI until the long term. With
productive capacity limited due to capitalisation and firm infrastructure RTI will not
require distribution breadth to sell its product. The North American market will have the
appetite to consume RTI's total production for many years. It is anticipated that foreign
distributors will solicit RTI before RTI threatens saturation of the North American
market.
Similarly customisation will not become an important competency for RTI until
the long term when the market approaches maturity and competition forces RTI to adopt a
differentiation strategy.
4.4.2 Internal Factors
Internal factors include the strength of the intellectual property, personnel, firm
culture and the ability of the firm to attract capital and create cash flow from operations.
As a technology with a new product entrant these three factors, IP, personnel and cash are
equally critical for success.
Initially the strength of the intellectual property will manifest itself in the
performance of the product as compared to the existing state of the art. When the
technology proves itself to be truly disruptive by increasing site production by 40% or
more the potential for the company will be established, but not fulfilled. Fulfilment will
require skilled personnel to negotiate the relationships with suppliers and the distribution
network, to organise the fabrication of the equipment and manage growth. At all times
the company will need strong cash flow to feed the growth, starting with adequate initial
financing to bridge the working capital gap during start up.
The potential for long term value on the technology side of the value chain is
dependent upon RTI's ability to create new value built upon the existing patents. The key
to success will be selection of applications that either accommodate patent enhancement
or in some way involve the development of an algorithm that is specific to the application
at hand. Patent enhancement is available through the addition or amalgamation of data
collection or intelligent systems into the existing mechanism. Perhaps some core
competency of understanding will develop in the use or manufacture of the equipment
that will assist in sustaining an advantage. This core competence may be leveraged into
new intellectual property or mastery of the art, which impedes further copy. Several
models for successful implementation of this type of strategy exist such as 3M, HILTI,
HP in the printer space and Sony at the consumer level. However there are examples of
failed long term technological dominance such as Xerox to Cannon and Kodak to Fujitsu.
The long term success of the first group of companies is attributable to the quality of its
people, the environment in which they work and the commitment of the companies to
continuously fund research.
Long term technological dominance depends greatly upon the quality of the
people involved and the creation of an environment that fosters innovation. The correct
people are required in two main areas of the company; R & D and senior management.
The R & D group must consist of leaders in the field of pure physics and engineering that
are blessed with an inquisitive nature. The senior management must be patient,
accustomed to risk, committed to bringing new products to market and be comfortable
with ambiguity. The researchers must be provided with the resources to explore in both a
pure and practically applied manner. They require access to the customer to understand
the customer pain and to the field environment to understand its constraints. When they
fail to produce or a project is unsuccessful they need the security of corporate
commitment to R & D to ensure they have the opportunity to continue to explore.
Senior management's commitment to R & D must be complete. With this
commitment an environment conducive to exploration will develop. However, they must
also exercise judgement and have a clear mechanism for evaluation of the potential of
each research endeavour to produce value. To each program there must be attached
metrics that permit periodic review and go no-go criteria that can guide, enhance or
terminate a project based upon its merit and potential to develop a beneficial result. The
key issue here is that the metrics are not accounting based, and are unlike any other
metrics in the company. The metrics are learning based and include: number of new
ideas, learning quality of the ideas or experiments, opportunities recognised and finally
problems solved. The mechanism used for evaluation must be translated clearly to the R
& D staff to ensure they understand the criteria upon which they are being measured. In
this way projects thought to be beneficial by one group are not stifled by the other,
creating conflict and ongoing animosity. Thus the environment is less a physical one then
a cultural one. The culture is one of commitment to innovation tempered by knowledge
of the costs of exploration.
The laboratory can exist in many forms, from outsourced to completely internal
and secret. In the foundation equipment business the laboratory consists of construction
sites. The laboratory staff consists of people who understand the industry, fostering
creative engineering of equipment or techniques with direct access to job sites where deep
foundations are being installed. This last criterion is very important. Beyond some
simple tests performed under controlled conditions the laboratory setting is quickly
transferred to actual job sites with contractors whose costs are on the order of $450 to
$600 per hour. It is on sites that the researchers confront the variable soils and piling
conditions they must overcome. If they cannot access real sites they cannot encounter
these variable conditions as they only occur across geographical regions and on property
owned by other people. With this access come the constraints of production schedules,
safety and the need for usable foundations with integrity.
The final long term key success factor is cash flow. Without a significant steady
stream of committed cash research becomes an on again off again endeavour with low
efficiency and success. A long term strategy of technological leadership cannot rely on
this type of process. A committed program will attract the cream of the industry for
research and contractor partners looking for the edge in terms of the next new technology.
4.5 Assessment of Strategic Alternatives
The strategic opportunities outlined in the previous section will be assessed using
the AHP model for both short and long term strategic objectives based upon their
capacity to meet three criterion. How they satisfy the key success factors set out. How
they use the limited resources of the company, both financial and human resources
(internal factors). Finally, how they fit with the values and views of the management of
the company.
4.5.1 Short term
4.5.1.1 R q i d Prrlertwiiorl
Table 4.2 provides the AHP model results for the short term external and internal
key success factors. For the rapid penetration strategy the AHP model indicates a
diminished dependence upon the quality of the distribution network and customer service
and a high dependence upon pricing and market acceptance.
The quality of both the distribution network and customer service become less
important when the product is provided through all available channels. Essentially the
effect upon RTI of the strength of one distributor over another are cancelled out and sales
within a region are relatively constant. RTI will enjoy the benefits of the high quality
distributors that carry their product while the sales of poor distributors diminish. In
I Criteria
Key Success Factor Customer Service Distribution Breadth Distribution Pricing Customisation Market Acceptance Branding
Total
Internal Factors I Engineering Management Human Resources Financing Cash Flow Profitability
- Weight -
15 8 17 14 8 15 13 - 90 - -
20 18 15 10 7 10 14 16 - 90
Short Term Goals
Table 4.2 Short term strategy AHP model
addition RTI can position the distributors to compete against one another by creating
volume discount incentives or quotas. Similarly customer service is borne more by the
distributor with generic sales support provided by RTI.
The rapid penetration model enhances the importance of pricing
(competitiveness), market acceptance and distribution breadth (reach). Pricing becomes
very important to the rapid penetration strategy because a low price will stimulate sales
and high demand. The strategy relies heavily on achieving market saturation for success.
RTI can meet a low product price, relative to the industry. With an attractive price and
high productivity market acceptance should be high. It will rely however, on high
marketing expenditures, which will strain profits at the growing firm. Finally distribution
breadth will be important in order to achieve market saturation.
Due to the long and capital intensive sales cycle there will be further pressure on
profits and cash flow. In the short term branding will be of moderate importance, but
grow significantly with time. Customisation will play a minor role as the emphasis will
be on creating market saturation and efforts at customisation will detract from this
endeavour.
The rapid penetration strategy does not make effective use of the strength of RTI's
internal factors. The value of the IP and engineering skills upon which RTI is based are
of low importance for rapid penetration. This is a high energy sales and marketing
approach using price based offerings to attract buyers. Though the IP benefits the value
proposition and thus should influence the buyer decision, the rapid penetration strategy
emphasises price.
The management team is capable of pursuing this strategy but i t will strain the
company's ability to finance the necessary high production operation. Low pricing and
high marketing costs will reduce profits and cash flow, which for a growing company will
create significant problems. Finally the approach does not create synergy with the long
term ideals of management to create a high quality innovation based company that
capitalises on the strength of its technology. The overall AHP score is 1319, the lowest
of the three alternatives
4.5.1.2 Slow Skimming: Distribution
The three main key success factors: distribution, customer service and market
acceptance are well suited to the slow skimming model. In fact the strategy scores well
for all the key success factors. The AHP model predicts that the slow skimming
distribution strategy provides the best fit between the internal and external factors for
success with an AHP score of 1664.
The importance of distribution is high for this strategy but is well suited to the
partnering strategy outlined. Contact has been made with the leading channel in the
North American market (APE) with a very favourable response. Hence this factor scores
the highest of all the scenarios. This distributor provides high quality sales support to the
market leading contractors with a reputation for innovation and strong product support.
The synergy of APE'S approach with that of RTI's towards technology driven
differentiation is strong and results in high AHP scoring. The ability to roll the
technology out at a steady pace with industry leading contractors will allow strong pricing
control with good margins. APE has the strongest marketing effort in the industry and its
brand is gaining rapidly on the market leader ICE. It is anticipated that with the addition
of RTl's resonant hammer APE will eclipse ICE as the industry leader world wide and
provide consolidation opportunities within the market. The appetite of the leading
contractors for customisation will lend itself well to both the APE'S and RTI's
capabilities.
Similarly the internal factors of RTI are well suited to the slow skimming
distribution strategy. RTI's IP, engineering expertise and management capabilities are
well suited differentiation in the marketplace. Higher price points (then rapid
penetration) will create healthy cash flow to fuel rapid growth and overcome the lack of
early stage internal financing. Of great interest is the synergy of the approach with the
long term outlook of management towards a high quality technology differentiated
product that will generate cash flow and the exploration of alternative applications. In
particular the approach will result in a highly marketable company structure that may be
rolled into equity within the distribution channel or liquidated to fuel alternative
applications.
4.5.1.3 Slow Skimming: Services
For the slow skimming services model customisation and customer service
dominates the external factors as fewer, high profile and unique projects become the
target market. RTI can provide these competencies well. Marketing the technology
through a contracting arm results in highly regionalised capabilities where fewer
customers have more specialised needs. This eliminates the conventional distribution
channel and replaces it with a full services competence with very limited reach. The cost
of creating the contracting competence is high and thus a partnering approach is the
logical entry method. In this manner RTI becomes a segment of the value chain within a
larger construction entity. The attraction of the strategy lies in garnering the full benefit
of the value brought to the end user, the structure owner, who will pay a higher price for
the unique or more rapid solution. The caveat is that pricing the equipment through the
contracting arm is difficult as its value is muddied amongst the value provided by the
other competencies supplied by the construction entity. The result is that the pricing
advantage is difficult to capture for RTI and may be lost to the contracting entity.
Branding and market acceptance diminish in importance as the marketplace
becomes segmented and each project is treated individually in terms of marketing, sales,
proof of concept and acceptance.
The internal factors that are enhanced include the IP, profitability and financing.
Provided an adequate relationship with appropriate incentives can be struck with the
contractor partner the strength of the 1P should shine. The financing of equipment will be
improved as each project will create a budget for specialised equipment. Profitability
should be high and cash flow should be predictable, through a partnered, captive
contractor. However working capital demands in contracting can be high as the cash
cycle is generally long.
Synergy with the long term is low. The only option available is to sell out to the
contractor partner where minority shareholder and or limited marketability effects will
severely reduce liquidity and lift in value.
4.6 Long Term Strategy
Three options are considered for the long term strategy for RTI. They include the
continued involvement of RTI in the sale and lease of equipment through a single
distributor, supply of equipment to the market via a broad range of distributors and finally
as a technology based company seeking to apply the IP in a broad range of applications.
The first two options may be discussed together as they represent the thesis and
antithesis of strategy for long term survival in the pile driving market. Continued
distribution through a single, exclusive channel assumes that RTI is able to gain some
equity position in and participate in the channel. The use of multiple distributors assumes
RTI markets the product through a host of competing distributors, all of whom are
independent of RTI. Investigating the key success factors and internal analysis, Table
4.3, we find that the single distributor model scores well in the AHP model (score 1422),
where as the multiple distributor strategy scores poorly (1091).
Criteria 7 Key Success Factor
Customer Service Distribution Breadth Distribution Pricing Customisation Market Acceptance
llnternal Factors I P Engineering Management Human Resources Financing Cash Flow Profitability
Criteria Weight
15 8 17 14 8 15 13 90
Pile Driving wl Distributor
8 8 9 8 7 8 8
Table 4.3 Long term stmtegv AHP model
Term Goals Pile Driving Multi Distrib
6 9 4 6 5 9 6
Technology
7 9 7 6 10 6 7
The single distributor strategy satisfies the key success factors very well. The
existing partner's strong customer relationship is enhanced by the technology. Similarly
customer service and market acceptance are reinforced by the strong support RTI
provides to the distributor and customer in terms of technical support, sales, marketing of
the concept to the major owners (FHWA, DOT'S, Utilities and on high profile projects),
information sharing and the preparation of technical submissions. Each of these factors is
mutually reinforcing of the others, and each results in a stronger customer-distributor
relationship.
Pricing using an exclusive distributor becomes more controlled and allows the
maintenance of a sustained higher price. By participating in the channel RTI can keep
accurate account of the customer needs, trends and its perception in the marketplace.
This will permit RTI to capitalise on its capacity for customisation and sustain a flow of
new niche products into the marketplace that meet the customer's needs and permit
higher pricing models.
Distribution breadth is considered to be strong despite the use of a single
distributor. This is because the increased sales and presence experienced by the exclusive
distributor should permit consolidation within the industry. The marginal manufacturers
and distributors should experience increased competition amongst themselves for those
portions of the market that the revolution hammer does not dominate (anticipated to be 30
to 45% of all jobs). Thus the weak will not survive and the exclusive distributor, now
cash rich, can selectively buy up the distribution relationships of the marginal players,
thus strengthening their reach in previously underrepresented areas. As seen in the
industry analysis the opportunity for consolidation within this industry is considered to be
high.
Branding will remain an important and accessible factor in RTI's long term
strategy. Co-branding opportunities with the distributor will be capitalised upon. Using a
name synonymous with the technology, i.e. Resonant Hammer Corp, will entrench the
product within he contractor's and engineer's minds. Leading the market in terms of
technical knowledge, case histories and research will further separate the brand from the
competition. Just as Hilti is the 'only' name in fasteners Resonant Hammer will become
the only name in deep foundation equipment.
Comparing this to the key factors satisfied by the multi distributor channel
approach we find stark differences. While using multiple distributors circumvents the
strength of the distribution channel, in the long run its advantages are undermined as well.
The objective would be to create a leap in the relationship from the contractor and the
distributor to the contractor and the manufacturer. To achieve this goal would require
replication and duplication of the very channel RTI was attempting to circumvent.
Eventually the buying decision comes down to risk and comfort in terms of support and
ensuring the equipment will be serviceable. This is done in the trenches at the distributor
level. Until RTI can have a representative in every geographical region they cannot
satisfy this need and leapfrog the relationship. Thus the distribution channel is open to
promiscuity.
While this model does provide for RTI to create great market acceptance through
the same technical support activities outlined above and delivers exceptional market
breadth, the precarious nature of the manufacturer distributor relationship allows for the
emergence of a low cost provider to quickly undermine and capitalise on the effort and
success of RTI.
Given the choice between differentiation and low cost provision, RTI would have
to select low cost. By transferring their manufacturing to China or Southeast Asia RTI
could leverage their brand and 1st mover advantage effectively to continue market
penetration and sales. Selecting a differentiation strategy would leave RTI expose to a
low cost Asian manufacturer who could use the market acceptance and distributor
network created by RTI to rapidly overtake sales. The model demands that a significant
price reduction be adopted to generate volume and maintain revenues. Thus pricing and
profitability ratios are severely curtailed using this strategy. Customisation is similarly
thwarted because RTI can no longer achieve intimate contact with the customer and
determine what to build or what cost structure to adopt. Lower revenues and profits
restrict the ability of the company to conduct research and create industry leading niche
products.
Finally branding becomes even more important under this scenario, but RTI's
ability to achieve it is undermined by the lack of contact with the customer and lack of
control over their image as it is portrayed through the indifferent distribution channel. It
is entirely up to RTI to establish brand through their 1st mover advantage, efforts at
advancing the art and presence in industry publications and conferences.
The internal factors are better suited to the single as opposed to the multiple
distribution model. Both models make good use of the IP and engineering competencies
of RTI. However for each of the other internal factors the multiple distribution model
falls short of optimising RTI's capabilities.
In terms of management skills and human resources the single distributor model is
superior. For this model the management team and staff are a smaller, high quality group.
This lends itself well to organic growth and the support of a single channel. The slower
rollout creates the opportunity to create a higher quality team through mentoring. Using
the multi distributor method will require rapid growth, straining the management team
and its ability to acquire and train support staff. It is inevitable that fewer high quality
personnel will be deployed. The result will be lower quality service, problems and
increased costs to correct mistakes. In direct proportion to the management and human
resource needs are the financing and cash flow requirements. RTI will build cash flow
slowly and lean on external financing only when necessary to manage their working
capital needs. Using a slow skimming approach with a single distributor will enable
greater control over these needs. A captive distributor can be trusted and managed to
provide consistent invoice payment or even bridge financing. This will enhance cash
flow and should result in a shorter cash cycle. Fluctuations in production or working
capital needs can also be managed better through a single distributor. The stronger
relationship extending through to the customer can be leveraged to obtain down payments
for equipment at the time of order or improved payment terms. The relationship can be
used to manage bad clients more effectively through advanced recognition of problem
accounts and knowledge of the current status of clients.
The multi distributor channel will be driven by sales volumes and competition as
opposed to relationships and revenue risk for the sole distributor model. Each competing
distributor will concentrate on generating sales as opposed to getting paid and collecting
bad debt. Transactions will be more arms length with reduced trust and commitment in
the relationship between RTI and the distributor. This will place downward pressure on
cash flow and extend the cash cycle. Financing needs will also increase as the
distributors will require a large equipment pool and access to lease to purchase sales
structures. A portion of the burden to carry this high capital cost will fall upon RTI. In
fact RTI's success may largely rest upon their ability to finance and provide a large pool
of equipment, which the distributors can access. With limited capital assets RTI will be
forced to acquire funding through sale of equity or going public.
On the manufacturing side the operations will have to be moved to Asia at
considerable cost. Either a new facility will have to be created or an OEM relationship
will be created. A new facility will demand a large capital outlay. An OEM arrangement
will further reduce cash flow and lengthen the cash cycle as the OEM will demand 30 day
terms while industry continues to push to 60 to 90 day payment. At worst Asian OEM's
have a history of forward integration into the markets they serve. As discussed above this
became the demise of the dominant impact hammer manufacturer, Delmag, when they
contracted manufacturing through a Chinese OEM.
Finally the profitability of using a sole distributor is expected to be superior to that
of the multi distributor model. The differentiation model should garner higher profits
despite the probable reduction in sales volumes as competition enters the market. The
strong customer relationship, participation in the distribution channel and first mover
advantage should sustain premium pricing with higher margins. The low cost model will
reduce margin that would be offset by increased volumes. The required access to a large
pool of capital and resulting dilution of the present ownership compounds to reduce the
return to the founders. Finally a dilutive option is not favourable with the philosophy of
the existing management.
Selecting the technology based long term strategy is an attractive option for RTI to
consider. It satisfies the external factors well and is particularly well suited to the internal
factors of RTI. Distribution remains an issue where it is perceived that in new markets
RTI will not possess a channel and have to build or partner with an incumbent. However,
the model discussed above using a sole, industry leading, quality distributor should hold
in most industrial markets. Provided RTI management remains cognisant of the value of
the distribution channel and continues to reward and incent it, profitable relationships
should remain available. RTI will continue to require quality technically oriented
customer service and distribution support services. In concert they will require skills at
market entry and the creation of market acceptance in each new industry of application.
These skills will not be as easily acquired as for pile driving where the existing
management possesses significant industry expertise.
The pricing of products in new industries is scored lower in the AHP model
becomes it becomes an unknown factor. It cannot be determined at this point if a
significant value proposition can be generated with the technology in other industries.
Similarly the value and need for branding is unknown, however with the advantage of a
strong history in pile driving there will be some brand value to extract and extend to new
industries.
Both distribution breadth and customisation are considered to be important and
available through RTI. Expanding to new applications will create widespread opportunity
for the technology. In addition the versatility of the technology is as yet unrealised. It has
been stated that to date high powered energy at frequencies between 60 and 250 hertz has
simply not been available. The simplicity of the mechanism and its compact size render
it highly versatile. Thus the application and customisation potential for the technology is
both broad and exciting.
The technology strategy is particularly well suited to the internal factors present in
RTI. With the highly rated IP and strong, diverse engineering talent pursuing alternative
applications is considered feasible and motivating. The variety and depth of the
backgrounds of RTI's management, the owners of the IP and the engineers under
employment create a veritable melting pot of engineering acumen and talent from which
to draw upon.xii
The pursuit of alternative applications will be accomplished using the existing
cash flow from operations from the pile driving application. Thus financing can be
acquired and applied as necessary and as the potential for the application warrants. The
potential for both cash flow and profitability are deemed high because the evaluation of
each application will be scrutinized for economic benefit and only the best selected for
deployment. For this analysis it is assumed that one of the selected applications would hit
a home run.
Both the sole distributor and the technology long term models scored well using
the AHP method of analysis. In fact the models scored virtually the same, only 0.5%
apart. Thus either model could be considered optimal as a long term strategy.
These fields include: laser physics, advanced instrumentation, power optimisation, nuclear physics, composite materials, aeronautics, acoustics, high pressure physics, structural dynamics and pyrotechnics.
The continued sale of hammers by RTI in the pile driving market is perceived to
demand participation within the distribution channel. All successful manufacturers in the
current market own their own distribution network. Each of the failing manufacturers in
the market suffers from a poor or truncated distribution network. It is believed that
technology alone can acquiesce market entry and create purchase in the market but there
is no historical precedence indicating it alone can sustain a business. It remains a fact that
all technology will experience competition. This will force RTI to adopt either a low cost
or differentiated approach. As discussed within the industry analysis, the value chain
analysis and the section on short term strategy the relationship between the distributor and
the customer rules the market. Without participation in that relationship RTI will be
precariously susceptible to new market. entrants, changes in price structure, fluctuations in
the business cycle and a host of other marginal events. In effect the business model
would become metastable.
4.7 Discussion
The model selected for market entry is the slow skimming distribution strategy
evolving to a technology based long term strategy. The reason for this selection is that it
provides the greatest flexibility for near and long term adaptation to market conditions
with a reasonable demand for capital.
The slow skimming model requires low to medium capital infusion and can
support organic growth of the company. In addition it is well suited to the external and
internal competencies of the company and fits well with the management philosophy of
high quality high knowledge content products. Following early market assessment this
strategy permits adopting a fast penetration model if the technology, manufacturing
capacity and access to capital become available at favourable terms.
In the long term the company can assess the pile driving market, the cost of
accessing the distribution channel and the attractiveness of alternative markets in its
decision to remain in the pile driving application or move to a technology model.
Organization Chart
RTI
Equipment Purchasc L
Exclusivity
Manufacturing ' $
Capital
External
/ $
Distributor 1 Rental CRM
Figure 4.1 Proposed organisational chart for slow skimming distribution strategy.
In light of the above a series of potential structures was evaluated and the
following model was adopted, see Figure 4.1. The model involves the development of
RTI as manufacturer of equipment partially held by a single well established distributor.
RTI and the distributor jointly hold a capital company that exclusively purchases the
equipment produced by RTI. The capital company then rents the equipment through the
distributor to the customer.
The model takes advantage of the most flexible sources of funding for the
companies. Initially the founders, the distributor and an angel investor fund RTI. The
angel is brought to the table to offset the financial power of the distributor and provide
RTI with access to capital and options. The capital company seeks funding from RTI, the
distributor and external sources including asset based financing companies, angel
investors and conventional lenders. A key component is the asset backed lender. With
technological supremacy and good market penetration the capital company and the
distributor will enjoy high rental rates and utilisation. This will provide a strong early
balance sheet for the capital company and attract asset backed leasing investors. The
equipment is attractive from the point of view of the asset backed lender because 50 to
60% of the value of the equipment package is made up of the hydraulic power pack. This
equipment has high resale value on the open market and thus the risk to the lender is
reduced. More details of the leasing structure and cash path are provided in the net
chapter on company value chain.
5 STRATEGIC IMPLEMENTATION
RTI's value proposition is to provide and service innovative equipment that is
capable of solving new problems or attaining higher production rates than any other
equipment on the market. The present technology has an excellent opportunity to
establish this value proposition in the foundation construction market over the next 8 to
10 years. With expansion into other markets and patent enhancement there is significant
opportunity to sustain this model for the next 15 years.
RTI's goals will be attained through excellence in management, engineering,
distribution and sales support. RTI controls its own destiny in terms of management,
engineering and sales support, but lacks the financial capacity to penetrate new markets
and establish independent dealer networks. In selected markets RTI will have the
opportunity to purchase, merge or become an OEM to companies exhibiting strong
distribution network competencies. However, adding a strong distribution channel to
their value chain in key industries will be imperative to their long term survival. In
addition sustaining a product portfolio of stars and cash cows along side the aging dogs
will ensure a viable enterprise.
5.1 Company Value Chain
The RTI value chain for the slow skimming distribution strategy is provided in
Figure 5.1 below. RTI's core competencies are shown in bright yellow and its
secondary competencies are shown in pale yellow 0. This emphasizes those areas
considered to be vital to maintaining RTI's value proposition in the future and those
competencies that are considered to be mere support or available for outsourcing. The
contribution of the distribution network is shown in orange r and includes sales,
product support, service and branding.
Firm Structure Legal Services Financial Sewices
Human Resources / aLi2 t ion 6 TI
Heaith Semipas Culture SL I
Management
;oftware Dew dew Annl imtim
Procurement
1 iupp lerificatic :omponent QAIQC Jurchasing htsource Fabrication
Primary Activities
.Engineering .Training & Certification
-Assembly SOEM Sales 4AlQC - .Sales Support
*Pricing -Credit Repoftinn -Information Processing
Markets
Creative I -Parts Printing Warehousine .-L--
~Fabricatior -Testing
Building Maintenance & Repair Security Sewices Waste Disposal I
*Fieid Servlca +arts Suppl) I
Logistics Manufacturing Sales Marketing Distribution
xiiiFigure 5.1 RTI Corporate Value Chain
The value chain for RTI is intertwined with the distribution company through
their partnership. In many ways the companies become, or at least appear to the clients.
to be one. The distributor's strength of marketing, in house distribution, servicing and
sales network are invaluable to RTI. Without the infrastructure to provide rapid, high
quality field service RTI's product will languish. The distributor's name provides instant
trust within the contracting community that the resonant hammer is available, will be
serviced and will not fade from the landscape in the near future. As a result the RTI value
xiii Adapted from class notes MBA 607 Business strategy, Professor Ed Bukszar.
chain is shown as having a continued mix with the distributor with a fading between
where RTI ends and the distributor begins.
What follows is a detailed description of each of the components of the proposed
company value chain as it pertains to the short and long term objectives of the slow
skimming strategy. Each section provides a discussion of vision, overall objectives and a
detailed temporal analysis (the 1" 3 years of operation). Table 5.1 provides a personnel
chart indicating the anticipated near term growth needs of the company.
CEO VP Sales Sales
VP Marketing CFO Controller Clerical Engineering Mngr Engineen
Operations Mngr Mechanics Technicians Labour R&D Engineers Technicians
Administrative
Table 5.1 Personnel forecast for the 1" 3 years, 2005-2007
5.2 Primary Activities
5.2.1 Logistics and Manufacturing
RTI's logistics and manufacturing activities will be closely tied. As a
manufacturer that outsources most of its fabrication activities RTI will require
exceptional just in time (JIT) inventory management to maintain efficiency. A major
component of the JIT system will be relationship management of the suppliers. This will
include working closely with them to determine optimum fabrication and machining
procedures and chronologies. A supplier verification process will be implemented that
ensures each supplier is qualified, has an in house QA I QC program and can produce the
required volumes on time. RTI personnel will conduct on site QA I QC testing and
verification of supplier procedures to ensure product quality and traceability (to I S 0
9000).
RTI will maintain assembly of the hammer and direct hammer ancillary parts,
including clamps and suppression systems. The fabrication (machining, boring, welding
and finishing) of parts will be outsourced to the ample high quality shops found locally in
Vancouver and Seattle. The electronic control system and servo hardware will be
similarly outsourced to local suppliers. The board configuration is custom but readily
available locally. The algorithm will continue to be developed and refined in house
through RTI and it's sister company Resonance Technology PTY, the Australian supplier
of mine sweeping mechanisms. There are no relevant IP issues other than the algorithm
development, which will be maintained in house. RTI will invest in all specialty tooling
and sub-assemblies required to fabricate and assemble the hammers. RTI management
through previous industry experience held by the founders has identified outsourcing
suppliers.
Through its relationship with the distribution partner RTI will provide the industry
standard ancillary equipment such as leads, gates and kickers. It will outsource the
majority of the power pack fabrication and assembly to specialist fluid power distributors.
RTI will however, assemble a small number of the power packs to maintain service
expertise. RTI will provide a service to repair and overhaul the equipment and hold a
parts inventory from which to supply regional distributors. Much of the service and
overhaul capability will be outsourced to the fluid power specialist, but RTI will log and
keep a data base on all repairs and warranty items that occur to assist in design
modification and improvement.
Outsourcing all or portions of the assembly may result in further savings but has
the downside of a loss of product expertise and reduced servicing capability. Conducting
assembly in house permits training of service personnel and development of repair and
servicing expertise. These skills prove to be essential for product support.
In the year 2005 when the initial four production units are manufactured logistics
and assembly will be conducted by the Operations Manager and the company founder.
The proposed operations manager is an experienced manager in precision technical
manufacturing with significant talents in bringing new products from R & D to
production. It is necessary for the founder and operations manager to conduct this work
initially in order that they possess an intimate understanding of the requirements and
procedures of co-ordination and assembly of the equipment. Only four hammers will be
assembled during the 2""ad drd quarters of 2005. Each hammer will require 40 to 60
man-hours to assemble. The founder will serve as the initial product support specialist
and thus will benefit from a full understanding of the product.
By 2006 an engineering manager, mechanic and technician are added to staff
when a total 18 hammers are produced. In 2007 CAD capability and additional technical
staff are added to accommodate production of a total of 34 hammers. By 2007 a staff of 2
Sr engineers, 1 Jr engineer, 2 mechanics, 1 technician and 2 labourers are available.
During this period R & D staff are added who will train by assembling hammers, thus
acquiring intimate knowledge of the product. The operations and manufacturing staff
will provide equipment servicing, training of distributor service staff and issue service
bulletins to the customer.
5.2.2 Sales
In order to capitalize upon the technological superiority and economic
attractiveness of the RTI hammer a strong sales presence will be required through the
combined efforts of RTI and the distributor. RTI will employ a sales support staff that
will co-sell to the major contractor accounts in North America and eventually Europe.
The major accounts will be defined as those contractors with over US $8 million in
foundation equipment inventory and annual sales in excess of US $20 million. In this
manner RTI will support each of the regional distribution offices with frequent visits for
training, updates, literature and sales support. RTI will use these opportunities to enhance
client relationships, visit local job sites, observe how the equipment is being used and
how projects are being coordinated. This information, though shared with the distribution
partner, will be invaluable for future product development and to enhance cross client
value.
RTI will host a website that features special owner's section with restricted
access. The owner's section will become a forum for new applications, construction
methods, safety, ways to save and tips on good practice. In addition the owners section
will have a post board for sales, exchanges, comments and client feedback. There will be
a section for contractors to post poor performing or non-paying suppliers and clients. It is
hoped the RTI site will become an overall resource for the contractor and part of their
daily check list to visit and update themselves.
RTI will provide client support to introduce and verify the technology to the major
owners and owner's representatives such as the FHWA, DOT'S, Utilities, consulting
engineers and major developers. This will include demonstrations of foundation
performance, integrity and conformance with their individual needs and standards.
RTI will create a training and certification program unique to its product. Clients
will be trained in the mechanics of resonant pile driving through instructional sessions
and the use of simple physical models. Each client's field staff will be put through the
training program and be certified in the use of the product. This will enhance their safe
and productive use of the hammer benefiting both RTI and the client. The training will
augment the 'pile buck' (foundation construction personnel) training school already in
place in the industry. Here trades people are enrolled by their employers to learn new
methods, best practices and improved safety systems.
RTI will continue to study the market and apply various pricing models and
strategies in order to establish the most appropriate market position and profitability
model for the hammer. The slow skimming distribution strategy will be applied through
a rental only sales model. By providing a rental only model the contractor sees no up
front charge for trying out the equipment nor do they assume reliability and maintenance
risk for a new product. The reward to RTI is a steady, high revenue stream due to the
superior product performance, low cost to manufacture the device and its anticipated low
maintenance costs.
An important aspect of the RTI sales effort will be the avoidance of poor clients.
In the construction industry poor paying clients and those that do not treat equipment well
are to be avoided. A significant loss can be incurred by the equipment supplier through
non-payment of invoices, damage to the equipment or abuse of warranty claims. The
golden rule of construction is 'He who has the gold rules' and suppliers tend to be at the
end of the gold line. While certain avenues are available to recover losses (liens and
litigation) they are expensive, have poor recovery and tend to alienate those that are
influenced by them, namely the general contractor who suffers a loss when a lien
involving one of their sub contractors occurs. It is simpler and more effective to simply
refuse further business with the offending parties. This signals to other contractors that
they clearly have one chance to make and sustain their reputation with the Resonant
Hammer supplier.
Initially all sales activities will be conducted by the company founder. The task in
2005 will be to secure the best trial users of the first 4 production hammers. The selected
trial users will have a pedigree of early adoption of new equipment and techniques. They
will indicate a commitment through undertaking a rental of the hammers and ensure
active use. The selection process is already under way with four contractors having been
identified, approached and verbally committing to the product. The first demonstration of
the equipment will be in the fall of 2004 in coincidence with the annual DFI conference
to be held in Vancouver, BC. All of the proposed trial contractors are North American
based, will be present at the conference and will witness the operation of the prototype
machine.
Early in 2005 a distribution agreement will be consummated between RTI and the
preferred distributor. From this point onward sales will be lead by the distribution partner
with the support of RTI. Initially this support is anticipated to be high. Thus a VP of
sales is brought on at the beginning of 2006 when production and sale of hammers to the
market begins. The VP of sales will begin by assembling hammers to ensure he fully
understand the parts, assembly and operation of the technology. In 2007, two additional
sales support staff are added to the team. During this period all sales are anticipated to be
through the distributor's existing customer base in Canada and the USA.
The introduction of the technology to the major owners will be managed by Alan
MacNab, of the RTI board of advisors. Alan will be hired on a contract basis to attend
seminars, sit on design committees and lobby the government organisations to use the
technology. Alan has significant stature within the industry after years of servicing as
president of the various industry associations and acting as an expert consultant to the
federal and major state transportation authorities.
5.2.3 Marketing
Marketing efforts will be lead by the distributor, but will be heavily supported by
RTI for its product line. It is important to note that RTI will maintain its own brand and
model designation at all times. The distributor will effectively market the 'RTI
Revolution Hammer' through its channel which will, through association, enhance its
brand. Thus both companies gain brand equity. This will ensure the distributor does not
completely own the distribution channel. If RTI does not establish a brand then it risks
losing market share when the patent protection expires. Under this scenario the
distributor could reverse engineer RTI's product and manufacture its own resonant
hammer.
RTI will develop its own product literature, creative content and advertising in
support of the work that the distributor performs. It will share in the client relations
developed by the distributor and in the advertising benefit through its brand.
Initially marketing activities will be undertaken by the company founder and the
VP of sales. In 2005, efforts will be understated as the first 4 production units are trialled
and a database of projects is developed. In early 2006 sales will be to existing customers
of the distributor and be affected mainly be word of mouth. As the performance of the
technology becomes established a more proactive marketing campaign will be
undertaken. This will include augmenting the existing print advertisements of the
distributor to include Resonant Hammer copy. In addition the industry associations will
be solicited to conduct feature editorials on the technology. This will not be difficult as
the publications are eager to disseminate anything considered new or innovative to their
readership. Marketing and sales support budgets are on the order of US $10,000 on 2005,
US $120,000 in 2006 and US $250,000 in 2007.
An important and independent activity by RTI will be the establishment of new
markets for the technology and extension of the brand. The company will create a group
charged specifically with exploring associated geotechnical applications. Product success
will stimulate exploration of new markets further a field including materials compaction,
reaction catalysation and materials handling applications
5.2.4 Distribution
Through its sales and marketing staff RTI will provide extensive product support
to the distributor for sales and field support of the product. The support will be an
extension of the distributor's existing sales and marketing activities undertaken with RTI
personnel maintaining service bulletins, product use flyers and notification of new
products and ancillary equipment. RTI will also provide parts warehousing and supply to
the distributors, in house equipment servicing, overhaul and warranty management. As
part of the sales model RTI will provide rental contracts and negotiations, pricing support
and logistics support for the distributors.
The distributor will augment RTI's activities through provision of field service,
parts supply and financing support. Of these the field service and parts supply are the
most important core competencies provided for RTI. Excellence in field support
enhances each of the sales, marketing and distribution competencies. The service aspect
of the distribution channel provides the greatest perceived value to the contractor and
represents a deal breaker if poorly supplied or absent. It is through service that the
strongest bonds in the client supplier relationship are made and maintained. As a result
this is where the greatest value in the entire sales, marketing and distribution core
competencies is established. The distributor will own most of this contact and thus the
relationship. It will be imperative to RTI to participate in providing sales and service
support whenever possible. Contact with the customer and relationship building will be
key to creating additional product and brand value for RTI.
The partnered distribution network scenario is well suited to a start up company.
It limits the capital requirement for the company and restricts the distribution through a
single highly profitable distribution network in which RTI can share. It remains an issue
for RTI that if it cannot maintain a significant market lead through product innovation
that its value proposition and corporate strategy will become fragile. Eventually the core
competency within the value chain will migrate towards the distribution network and the
strength of the purveyor client relationship at the regional level. Developing a
distribution network as a start up company is not possible without a large capital infusion,
substantial managerial effort and years of presence in the marketplace. Alternatively
development of an independent distribution network by RTI following product adoption
in the marketplace would create channel conflict and alienation with the existing
distributor. Thus the partnership agreement with the distributor must include non-
competition and exclusive provision of equipment by RTI following patent expiry. The
logical alternative is to merge, purchase or be purchased by the distribution partner.
5.3 Support Activities
5.3.1 Procurement
As an assembly based manufacturer outsourcing competencies will become
increasingly important to RTI. Constant attention to supplier qualification, verification,
component quality assurance and quality control will be imperative to ensure high
product quality and efficient manufacturing. This model will place added pressure on
purchasing competencies to ensure purchased goods are of high quality, appropriately
scheduled and delivered on time.
These activities will be the main focus of the Operations Manager upon joining
the company in 2005. He will source and evaluate numerous potential suppliers and
select from the best candidates. An ongoing process of supplier evaluation will be
maintained by the operations staff to ensure product quality.
5.3.2 Technology and Development
Research and development, design and testing are the mainstay of Resonance
Technology International's value proposition. Through innovation RTI will establish
itself within the industry with products that lead in terms of production and ease of use.
This core competency is the result of decades of experience in the design, sale and use of
foundation construction equipment by the lead engineers at RTI. Excellence lies in both
the technology and the details of design.
Ongoing advances in the computer control and feedback system will result in
additional client benefits through determination of driving resistance and foundation
capacity (presently under patent application). No other construction method can provide
a built in record of installation and determination of foundation capacity. This provides
enormous user benefit to the contractor and the consulting engineer.
The gains in efficiency do not stop at the development of resonance within the
pile. The design of RTI's equipment is optimised to permit more rapid rig up of the
equipment on site. This is achieved by providing an integrated hydraulic hose bundling
and hammer stand with every device. The stand is designed to bundle the hoses while
maintaining a maximum 8ft trucking width. Thus the hammer, power pack and hose
bundle can be transported while occupying a minimum amount of truck deck space and
can be mobilized in just 2 lifts. The hammer and hose bundling stand can be used on site
to prevent the hammer from being laid on its side, thus reducing hose wear during lay
down. These design features are just a few of the many advantages built into the system
by engineers who are intimately familiar with the construction process. This familiarity is
maintained through active participation in the construction process. This participation is
achieved in several ways. The engineers participate in sales calls and visit construction
sites regularly where the equipment is being used. They sponsor and attend pile buck
training schools where experienced superintendents train industry personnel.
As part of the design process RTI engineers are retained to create specialty
adaptations or geometries of the equipment to satisfy client needs for unique demands and
projects. The requests are client driven and require the RTI engineers to design
modifications of the equipment, special attachments or completely new geometries to
satisfy peculiar construction project requirements. This extends the engineer's grasp of
the equipment, forcing them to think out of the box and create novel solutions. Invariably
these solutions make their way into the base product. More than anything else this
competency invigorates and sustains the company's innovative character while creating
added value for the client. In many cases the innovations created by the RTI engineers
result in significant project margins for the client.
In addition to technical research RTI will perform industry leading market
research. This will be achieved through active partnering and participation with the key
team contractors with whom RTI developed its product. By continuously and actively
participating in the construction process and developing new client driven product
applications RTI will maintain a high knowledge of labour, materials and construction
processes. This will be enhanced through attending worldwide conferences, not just in
foundation construction but in related industries such as oil and gas, mining, earth
moving and tunnelling. Each of these industries use sister technologies that may be
adapted for RTI's market.
Development of the resonant hammer product will concentrate on ease of use and
flexibility. Though the system uses a sophisticated algorithm to control the operation of
the hammer, the user interface must be 'idiot proof.' The equipment will be controlled
from the cab of a crane by an operator who is adept with equipment but is not familiar
with the concept of resonance. As a result the equipment will have a simple and effective
interface that requires a minimum of operator intervention. The development of such an
interface will require time and investment by RTI, but will also represent a barrier to
entry for the competition.
A major component of RTI's core competency will be attained through its
product's unique capacity to be applied to other industries. The resonant hammer
represents a high energy tool operating at a frequency range which has never been
attained by industry in the past. This means that copious applications for the technology
have yet to be identified. In particular the technology can be applied to densifying soils
and other materials, as a vibration source or to catalyse reactions (mixing and agitating).
These applications will generate eureka events that will translate knowledge back to the
foundation construction industry and vice versa. New applications will permit RTI to
generate revenues as an OEM to a variety of other industries.
Research and Development activities will be managed and driven by the company
founder. A Sr engineer will be added in mid 2006 who, with the assistance of the
Operations Manager and sales staff will select and pursue solutions to the perceived
foundation market needs. Significant budgets are available by late 2006 (US $200K) and
2007 (US $600K) to create new products and investigate new applications. In 2007 a Jr
engineer and technician are added to the team. In future years between 8 and 10% of
sales will be devoted to R & D, leading to budgets of up to US $4mm annually by 2010.
5.3.3 Firm Infrastructure & Human Resources Management
RTI will concentrate on providing a culture of excellence and personal growth
amongst its employees. This starts with stringent hiring practices where not just technical
skill, but personal, social, leadership and group work skills are evaluated and rewarded as
well. Once hired a continuous investment in the personnel will be made in education,
training and personal developnlent. Remuneration will be tied to productivity and the
attainment of career and personal goals. RTl's future success will be dependent upon the
quality and capacity of its managers and engineers. In the long run the only sustainable
advantage RTI will hold will be the ability of its management to make better and quicker
decisions than its competition.
5.3.4 Legal Services
Legal services are reserved for patent creation, enhancement and enforcement. It
will be very important to RTI to enhance its existing patents and sustain protected
technology into the future. As important as it is to patent its technology, it is more
important to litigate infringements. Though patent litigation is truly the sport of kings,
without a credible threat of litigation, infringements will occur at will. RTI must become
known as a company that will enforce its rights within the marketplace.
5.3.5 Management
RTI has assembled a small management team to see it through start up and
fabrication of its 1" production models. The management recognises that it will require
the addition of financial, sales and operations expertise in the immediate future as the
company grows towards its goals. RTI has sourced three key personnel in the Vancouver
community to augment the team.
RTI has located an economist with over 12 years of experience in financial
management and commercial banking. He specialises in financing companies with over
US $10 million in annual sales. A native of Northern Europe, he has international
business experience, is fluent in 4 languages and is completing his MBAICMA charter.
In sales; RTI has sourced a professional engineer with over 10 years experience as
a sales representative, engineer and sales manager in hydraulics and construction tools.
He presently acts as Regional Manager of a multi disciplinary sales team for one of the
leading international construction tool and marketing companies. He specialises in profit
centre management, sales and marketing, recruiting, employee training and development.
RTI will enhance its technical team through the addition of operations and
manufacturing expertise. RTI has sourced a physicist and engineer with 12 years
operational experience managing manufacturing and quality assurance operations for a
leading edge worldwide manufacturer. His experience includes numerous R & D and
prototyping projects and bringing new products into production. In addition, RTI has
access to a host of technical and operations expertise through associations with industry
experts and University Professors. These relationships were developed by the company
president through years of active R & D and product management within the North
American foundation industry as a manufacturer, consultant and contractor.
2004 2005 2006 2007 2008 2009 2010 2011 President 0.5 1 1 1 1 1 1 1 VPISales 1 1 2 2 3.5 3.5 VP / 1 2 2 2.5 2.5 Marketing CFO 0.5 1 1 2 2 2 2 Eng. Mgr. 0 0.5 1 1 1 2 2 2 Manuf. Mgr. 0.5 1 1 2 2 2 2
Total 0.5 2.5 5 6 10 11 13 13
Table 5.2 Proposed RTZ management team growth
Table 5.2 indicates the anticipated management team as the company grows. The
chart indicates the emphasis placed upon operations within the first 2 years of existence.
During this time sales will be handled by the president and the distribution partner as the
key national accounts are established. As sales increase dedicated sales and marketing
management is added to ensure quality and consistency throughout the distribution
network.
RTI has assembled a talented board of advisors including: Martin Fabi, retired, is
the former CEO of Raymond Canada. Raymond specializes in the distribution and
installation of integrated warehousing and distribution systems. Martin is an experienced
corporate leader with significant manufacturing, distribution and customer relations
management experience. Lee Matherne, President, Premiere Inc. New Iberia, Louisiana.
Lee is an experienced and savvy oil patch executive who has led the way in providing
specialist equipment and services for the conductor driving industry in the Gulf of
Mexico. Lee and the president of RTI co developed direct drive diesel impact hammers
for exclusive use by Premiere for the conductor driving market in the Gulf. Premiere has
received awards for its exceptional rig safety record. Alan MacNab P.Eng. Vice
President, Sales and Marketing, Condon Johnson Constructors, Oakland, CA. Alan has
led a distinguished career in foundation construction including a term as President of the
ADSC. He is a recognized leader in deep foundation construction innovation, has
authored a book on deep foundation construction techniques and was recently a member
of an FHWA task force studying construction methodologies around the world. Alan's
experience and contacts within the foundation construction industry will prove invaluable
when negotiating distribution partnerships with manufacturers, distributors and
foundation construction companies. Craig Thompson, VP Business Development for
Wilson Banwell-Human Solutions. Craig has an MBA and a wide range of experience
in: general management, customer relations, sales and marketing, strategic planning,
technology, new product development and leading diverse teams to high growth. A senior
business leader whose recent accomplishments include managing relationships with 1200
customers nation wide, spearheading an innovative product launch in the US, acting as
part of a senior management team that achieved Canada's 50 Best Managed Companies
status.
5.3.6 Financial Forecasts
Six years of financial forecasts have been prepared for RTI indicating the
anticipated performance of the company assuming the footprint described in the previous
section. RTI will participate in the market place as a manufacturer supplying equipment
to an equipment holding or capital company. The capital company will rent the
equipment exclusively through an existing distributor's network. RTI and the distributor
will own the capital company jointly. In this manner RTI and the distributor form a
captive partnership and capitalise on the value of the disruptive nature of the technology
through the built in annuity of the rental model.
The financial statements provided in the body of the text include the forecasts for
RTI, the manufacturing entity only. The statements for the capital company, denoted the
Equipment JV, are provided in the appendix. The Equipment JV is treated on the RTI
statements using the equity method assuming a 49.9% holding.
The forecast income statements for 6 years are shown in Table 5.3 below. The
figure indicates a strong increase in sales throughout the first 5 years from 2005 to 2009
to a total annual production rate of 200 hammers. Hammers are sold to the Equipment JV
starting in late 2005 at a price of US $159K, increasing by 3% per year. Total sales are
made up of finished hammers (without power packs), accessories (clamps etc) and other
replacement parts. Parts sales (including accessories) start at 4 95 % per year midway
through 2005 and raise to 40 % annually by late 2009. This reflects the increasing pool of
hammers in the market that require accessories and parts. The industry average for parts
sales is on the order of 50 % of new hammer sales. Additional revenue is generated
through consulting services. It is common in the industry for the manufacturer to be
retained to develop special equipment or configurations of the equipment for contractors
to complete unique projects. A total of 1.5 % of sales is considered to come from this
source.
In 2005 during the trial period revenues consist of rental revenues from the four
trial production hammers. The contractors are charged to use the hammers at a rate of
$7,500 per month. It is assumed that cost to support the hammers will exceed revenues
early in 2005 and that the revenues will be intermittent due to breakdowns and redesign.
Revenues increase from US $ 20K in the first quarter of 2005 (22% utilisation) increasing
to US $50K in Q4 (55% utilisation). COGS for 2005 rental revenues are assumed to be
US $40K in the first two quarters and US $30K in the last two quarters. This assumes
high costs to maintain, repair and alter the hammers during the trial period. Charging rent
for the trial hammers reflects the value they provide to the contractor and will ensure the
contractors either use the hammer for production or return them to RTI. Utilisation of the
four trial hammers is assumed to be 66% in the year 2006 and 75% in subsequent years
with COGS set at 25% of revenues.
The hammer COGS is assumed to be US $ 80K per hammer. It is anticipated that
the efficiency of production of the hammers will increase with time, but that inflationary
pressure on labour and raw materials will hold the total costs constant. Sales,
engineering, administration (including legal, disbursements, insurance and bad debt
expense) and R&D expenses are taken as a percentage of sales generally at 5,7, 18 and
6% respectively in 2006. Initially legal costs are set to a minimum of US $22K per anum.
h o m e Statement All data in ($000~)
Revenues Sales, Parts, Rentals 50% NZfrom JV Consulting
Total Revenues
Cost of Goods Sold Sales, Parts, Rentals CAT OEM Costs
Gross Profit
SGA Sales Engineering Disbursements R & D Legal Administration Travel Bad Debt Expense Office Salaries Management Salaries
rota1 SGA
EBITDA
Depreciation 4mortization
Interest Taxes
Vet Income
xiv
Table 5.3 Forecast RTI Income Statement, 2004 through 2009
The financial forecast spread sheets provided are the result of the combined efforts of Peter van Engelen and the
author throughout development of the company business plan
Engineering falls to 6% over time while administration and R&D expense rise to 13 $4 %
and 12% respectively with a maximum R&D expense of US $4mm annually. Insurance
rises to US $120K per year by 2007. Bad debt expense is held at just 1% of sales in
anticipation of selling to a captive reseller of the equipment. The patent, brought into the
company under license in 2003, will be amortized at a rate of 25% to closely approximate
the CCA Class 44 allowance. Income tax expense is calculated at a constant rate of
36.25%.
5.3.6.1 Further Assurnptiorzs
The RTI financial forecasts assume the Equipment JV will purchase the
equipment for full price. For simplicity no volume sales discounts or other incentives
have been modelled. The Equipment JV is assumed to rent the equipment as a market
rate of US $20,000 per month, increasing 3% per year. Current rates for APE and ICE
650 Hp (comparable) vibratory equipment are at US $14,500 per month.xv Current rates
for a Berminghammer B550 impact hammer or Delmag D42 are US $7,500 per m0nth.x~'
The crew and equipment savings due to the added production provided by the Resonant
Hammer over conventional equipment of a comparable or larger size is estimated to be on
the order of US $30,000 per month. Of significant added value to the construction team
and owner is the anticipated acceleration in schedule to completion. The equipment is
assumed to have an 80% utilisation rate, or approximately 8 weeks out of a 10 week
schedule. This is considered reasonable as most construction projects have a duration of
XV Obtained from current (2003) APE and ICE price lists.
XV' Obtained from current Berrninghamrner Foundation Solutions Ltd and PileCo of Houston, TX price lists
6 to 16 weeks with the hammer returning to the distributor for scheduled maintenance
between rentals.
Revenues are assumed to be split between the distributor and the Equipment JV
with the distributor receiving a flat fee of US $5,000 per month of rental and the
Equipment JV US $ 15,000. The flat fee is to cover overhead, marketing, sales and
general maintenance costs. When renting conventional equipment the distributor will
receive about 20% of the rental revenues. Thus promotion and rental of the Resonant
Hammer will be an attractive option for the distributor. In the year 2009 when an average
of 240 hammers are available for rental the total distributor revenues are US $I 1 Smm.
Sale of new equipment by RTI will parallel the rental market demand, which is
anticipated to outstrip the purchase funds available to the Equipment JV. Thus the
Equipment JV will require external sources of capital. These funds are assumed to be
available through additional investment by the distributor, founders, angel and by year 3
(2007) through asset backed lenders. Further details on the Equipment JV financial
statements are available in the Appendix. All profits for both RTI and the Equipment JV
are assumed to be reinvested into their respective companies.
5.3.7 Balance Sheet Items
For the balance sheet forecast it is assumed that trade accounts will approximate
the following schedule shown in Table 5.4. RTI will offer prompt payment incentives
and attempt to collect accounts receivable within 45 - 60 days. The balance sheet
provided in Table 5.5 shows value provided by the patent license and the investment
made by the founders in the prototype hammer. This reflects the financing requirements
for the manufacture of the prototypes and for working capital in the early stages of
development.
Account Days on Hand
Accounts Receivable 75
I Inventory 30 I I Trade Payables 30 I
Table 5.4 AP, AR and Inventory account schedule
5.3.8 Cash Requirements
Cash needs for RTI will be greatest in the first two quarters of 2005, during the
onset of production manufacturing. The total cash required is US $ 850K. A cash
infusion of US $600K is assumed during the final quarter of 2004. The funds will be
used to provide working capital to fabricate the 1" four 350 Hp production hammers. The
R A P grant money will be used to design, fabricate and field test clamp and suppressor
assemblies. Assuming a 75 day accounts receivable and 45 day accounts payable
schedule, the cash needs will be manageable into the first quarter of 2006, at which time
an additional US $250K will be required for working capital. The first four production
models will be held in an RTI rental pool for special projects and trials of new accessory
products.
The founders, the distribution partner and angel funding will initially provide
RTI's capital requirements. The founders have invested a total of US $350K in cash and
US $500K in the patent license which was taken as equity. The total external funding
required will be US $850K, with US $600K in late 2004 and US $250K in early 2006.
Growth is funded through the sale of hammers to the Equipment JV.
Assets Cash Accounts Receivable Inventory Prepaid Expenses Other Current Assets Total Current Assets
Long-term Assets Real Estate Machinery & Equipment (gross) Accumulated Depreciation Due by Officers & Affiliates Long-term Investments Rental Fleet Accumulated Depreciation Goodwill & Other Intangible Assets Accumulated Amortization Total Long-term Assets
Total Assets
Liabilities & Equity Short-term Bank Loans Accounts Payable Accrued Expenses Other Payables Income Taxes Payable Due to Officers & Affiliates Dividends Payable Current Portion of Long-term Debt Total Current Liabilities
Long-term Debt Other Long-term Liabilities Deferred Income Taxes Redeemable Preferred Shares Total Long-term Liabilities
l ~ o t a l Liabilities
Common Shares Preferred Shares Other Contribution Retained Earnings Total Equity
l ~ o t a l Liabilities & Equity
Table 5.5 Forecast RTI Balance Sheet, 2004 through 2009
Balance Sheet 1 2004 2005 2006 2007 2008 2009 All data in ($000~)
- I
-
Cash flow statements and ratio analysis are provided in Appendix D of this report
along with additional analysis including quarterly income and balance sheets, loan
projections, contribution margin and growth projections.
5.3.9 Break-even Analysis
A break-even analysis was conducted based upon the general forecast for RTI.
Given that reduced sales volumes will result in lower growth in SG&A and Capital
Expenditures on the rental fleet, a conservative estimate of break-even may be generated
holding the existing cost figures constant. Figure 5.2 provides the breakeven point for the
forecast 2006 corporate structure. The analysis indicates a minimum of 10 hammers must
be sold to generate a net positive income statement.
Figure 5.2 Break-even Analysis for Fiscal 2006
6 CONCLUSION
Market entry using a slow skimming strategy dovetails well with the long term
strategy options for RTI. A long term strategy targeting either manufacturing for the pile
driving space using a sole distributor or a technology development model can run parallel
for many years. Each of the long term strategy options scored well, and virtually the
same, using the AHP method of analysis. This would indicate that either may be
accepted as an effective long term strategy for RTI. What becomes of interest is the ease
by which they may be jointly or simultaneously pursued.
Long term success in the pile driving market has been identified to require
participation in a strong distribution channel with technologically superior products.
Thus success is dependent upon the quality of RTI's people and their ability to maintain
market leadership through product quality, innovation and support to the client (the
distributor). Long term success for the technological model depends greatly upon the
quality of the people involved and the creation of an environment that fosters innovation.
These competencies are one and the same. A strong research and development team
within the pile driving space will both: be fostered by the right culture and, will foster
exploration into and from alternative industries. Exploring new ideas for foundation
construction machines does not constrict the search to within that industry. Valuable
tools and lessons are crafted from exposure to alternative markets. This will result in
simultaneous discovery and development of equipment for foundation construction and
alternative applications. Thus a single base infrastructure is applicable for both strategies.
Similarly the financing capacity, management structure and marketing capabilities
will dovetail between industries. The financial forecasts indicate strong cash flows,
which will be directed towards R & D for the purpose of improving the technology.
Experience developed through the partnering approach, used successfully to distribute
within the pile driving market, will be applicable to negotiating and managing
partnerships in other industries.
The question becomes what will trigger the shift away from the pile driving
market to executing the technology strategy? It is suggested that an ongoing commitment
to technology based as opposed to industry based R & D will benefit the pile driving
application while realising opportunities in alternative markets. Thus with an ongoing
pursuit of IP improvement the company benefits from the introduction of new pile driving
products while searching for the next home run application in an alternative industry.
When the home run opportunity is recognised an in depth industry and market
analysis will be conducted and the market opportunity fully assessed. If the opportunity
is attractive then the capital requirements to achieve market entry are assessed. If the
internal rate of return is superior to the pile driving space then a switch in strategy may be
undertaken. Sale or partial liquidation of the pile driving business may be completed in
order to provide the working capital for the new venture and a new entity is borne.
While participation in the pile driving space may be maintained at a minority
level, it may also be fully liquidated in order to pursue the new endeavour. The new
company will become an R & D based company that spins off new companies to market
the IP produced by the parent.
APPENDIX A: PILING HAMMERS: A BRIEF
DESCRIPTION
How a conventional vibratory hammer works:
This schematic shows the eccentric mass gears from the side at four positions in time. The
eccentric gears are depicted as a disc with one side black (solid and heavy) and the other with
holes (perforated and light). At position 1 the eccentrics, rotating in opposite directions towards
the middle as indicated by the arrows, create a downward force due to the combined centripetal
acceleration of each eccentric gear. At position two the eccentrics have rotated to the side
uosition where the lateral centripetal acceleration of each eccentric opposes and cancels one
another. At position 3 the eccentrics have rotated to the top position where they combine to
create an upwards force. At position 4 they have rotated to the opposite side position and create
no net lateral force as they cancel one another out. The eccentric masses rotate about a shaft
slung on roller bearings. These bearings must withstand high variable forces which result in a
very harsh environment. Note the peak force is equal to the rotational velocity squared and thus
as frequency rises the force increases exponentially.
1 Suppressor
I Gear case
1 '
The diagram above shows the components of a conventional vibratory hammer, consisting of a
cable to hold onto the machine using a crane, a suppressor or spring to isolate the vibration of the
vibrator from the crane, the gear case that houses the motors and the eccentric mass gears and the
clamp used for holding onto the pile to be driven.
Base machine or
i hammer (yellow) in hanging lead (dark)
Drive cap E 1 Steel pipe pile I
This offshore style hanging lead and impact hammer are driving a large diameter
steel jacket for the oil industry. The hanging lead and drive cap are considered ancillary
equipment.
Pile nearing completion
A crane mounted hanging box lead with a hydraulic powered European impact
hammer driving a steel pipe pile. The pipe pile is near completion. The lead gantry, lead
and drive cap are considered ancillary equipment. The contractor may only supply the
crane and manpower.
7 Vibratory hammer
clamp for timber
A hydraulic vibratory hammer driving a timber pile. The ancillary equipment
consists of the special patented timber pile clamp.
APPENDIX B: HISTORY OF RESONANT PILE DRIVING
History of Resonant Pile Driving
The following abbreviated 'History of Sonic Driving and Drilling' is derived from
an extensive literature search conducted on high frequency, sonic and resonant pile
driving and drilling. Each of these terms; high frequency, sonic and resonant hammer
have been used to describe the realm of technology being discussed. The term high
frequency has been used because the operating frequencies required to achieve resonance
in a pile are substantially higher than conventional, or low frequency vibratory hammers.
The term sonic has been used because the frequencies required to achieve resonance are
within the audible range of the human ear.
The original experiments aimed at using vibrations to drill holes in the earth
started in the late 1940's. The initial goal was to speed up oil well drilling operations
with most of the research financed by the petroleum industry. In 1949 Russian Professor
D.D. Barkan of the Scientific Research Institute for Footings and Foundations reported on
research conducted on rotary-vibratory (sonic) drilling techniques. He proposed the use
of sonic vibrations in sinking geological exploratory drill holes. At a meeting in 1957 at
the Moscow drilling Institute, drilling rates of 3 to 20 times faster than conventional
methods were reported. An American firm, Drilling Research Incorporated (DRI),
conducted a well funded and documented development program, which was in operation
from 1948 to 1959. They developed a magnetostrictive-rotary-vibratory drilling system.
This method was not successful but it demonstrated that vibrations could speed up rotary
drilling rates substantially.
During this early period, Dr. A1 Bodine worked with Borg Warner on a down-hole
vibrator, which he called a 'sonic drill'. The machine operated using rotating eccentric
masses driven by drilling fluid. Using eccentric masses restricts force production to a
function of the square of the operational frequency. The down hole drill operated with
incredible production rates, unseen in the drilling industry before or since. It failed
because excessive vibratory energy caused mechanical failure of the down-hole
components. This occurred when resonance of the internal drill components caused high
accelerations and forces and subsequent failure.
In the early 1960's' Dr. Bodine developed a much larger top-hole vibrator with the
Guild Construction Company of Rhode Island and later with support of the Shell Oil
Company. The machine was intended to be used for oil well service work such as pulling
stuck casing and rehabilitating oil wells. Mr. Bodine received many patents in the 1960's
for his work with 'orboresonance' drives. His large vibrator had a capacity of up to 1000
hp but suffered from poor reliability. It was tested extensively as a possible high-speed
pile driver.
The 1000 Hp vibrators worked successfully on many projects posting impressive
production rates. These projects included the BART, Harvard University Museum
Building and Merritt Island, Mass (see articles in the appendix). Mr. Bodine's group had
started to develop a smaller oscillator when his equipment was sold to Hawker Siddeley
in the early 1970's. At this time Hawker Siddeley, a well-known British aircraft
manufacturer, founded the Sound Dynamics department to manufacture a line of
vibratory equipment. The goal was to eventually market machinery based on vibratory
technology for various applications such as civil construction. The original research was
targeted at developing a large vibrator capable of developing resonance in a foundation
pile. The thought was that such a machine could be used to drive the piling for the
Alyeska pipeline project (1975-77). Numerous attempts to produce large (750 to 1000
Hp) rigs failed due to reliability issues.
As part of its research Hawker Siddeley developed smaller vibrators that could be
used for drilling purposes. The machines proved successful in certain oil and gas and
gold exploration applications. A number of rigs were constructed and sold for these
applications. The early rotary-vibratory drills, or 'sonic drills' as they were called, were
not configured specifically as drill heads. They were basically oscillators that were
modified for drilling and proved to be very unreliable and prone to frequent breakdowns.
The earlier sonic drills used currently available 'standard' drill tooling which was not
designed to take the high frequency vibratory loads imposed by the sonic drill. The result
was frequent breakage of drill tools. Nonetheless, the rotary-vibratory technique
demonstrated that it had great potential in the drilling industry.
It was discovered during early experimentation that, in addition to being capable
of drilling holes fast, the machine had an outstanding ability to take truly representative
continuous cores of almost any overburden material. It was also able to core through
boulders and into bedrock.
The severe recession of the early 1980's discouraged Hawker Siddeley from
continuing development work on sonic drill technology. However, one of the engineers
in the Hawker Siddeley team, Mr. Ray Roussy felt that this technology had a lot of
potential if the equipment was developed specifically for small diameter drilling. He
believed that sonic drilling would become the method of choice for most shallow earth
drilling applications. For example, he had seen that one sonic drill could do as much
drilling and sampling as three or four auger drills during the same time period. Ray
purchased many of the smaller drilling machines from Hawker Siddeley upon their break-
up and started Sonic Drilling Corp. to market the product and provide sonic drilling
services. In addition, Hawker Siddeley sold several sonic drill heads to Midwest Drilling
of Winnipeg, Manitoba. Other than Sonic Drilling Corp., they were the only other user of
this technology in the early 1980's. They had built their own rigs and used the machines
to take core samples of mineral deposits for the mining and exploration industry.
In the mid 1980's, the environmental drilling industry became active in the United
States and Canada. A Minnesota based drilling company, North Star Drilling, Inc., had
some interactions with Midwest Drilling and was suitably impressed with the sonic drill's
ability to take continuous core samples. They eventually purchased the rigs and made
use of them, to advantage, in the environmental drilling field.
In the early 1990's, Boart Longyear, became interested in the potential of sonic
drilling technology. Boart Longyear is based in Salt Lake City, Utah and is one of the
world's largest drilling contractors. It eventually purchased the drilling business of North
Star Drilling to expand the Environmental Drilling Division of Boart Longyear. Sonic
Drilling Corp sold a number of drill heads to Boart Longyear who continues to be a
leader in the environmental drilling business with their fleet of almost twenty sonic drill
rigs. Sonic frequency technology has so many advantages in this application that the
demand for sonic drills in that industry continues to increase.
Mr. Roussy introduced the sonic drill to the environmental drilling industry in
Canada in the early 1990's. The activities of Boart Longyear in the U.S. and Sonic
Drilling Ltd. in Canada attracted the attention of other drilling companies. Although
unused for a good part of the early 1980's, most of the older style rigs that Hawker
Siddeley manufactured went through a series of owners, such as Water Development
Corporation, Resonant Sonic International, Prosonic Corporation (formally Alliance
Environmental, Inc.), Bowser-Morner, all of the USA and Tone Drills of Tokyo, Japan.
Manufacturing has been undertaken by Versa-Drill International, Inc., Ohio, Acker Drill
Company, Pennsylvania and Gus Pech Mfg., Inc., Iowa.
In the early 1960's Dr Alan Bies, a physics graduate from the University of
California at Berkeley came to work with Bodine industries, advising them on a number
of their research projects. Dr Bies recognised immediately that the Bodine sonic
hammers were fundamentally flawed in two ways. First they could not modulate
(control) the force that they produced at any given frequency. Because they used rotating
masses to produce vibration the force they produced was equal to the eccentric mass
multiplied by the square of the frequency of vibration. Thus increasing in frequency from
90 htz to 110 htz represented a 50% increase in force (and thus energy). When using
resonance to excite a body it is very important to control the force generation because if
too much force is introduced into the system it will 'gallop.' Galloping refers to the
tendency of a system to overload and experience destructive force and amplitude
generation, just like the Tacoma Narrows Bridge experienced. The ramification of this
was that when operating, the Bodine equipment ran the risk of putting too much energy
into the system and experiencing destructive amplitudes which the vibrator head would
not be able to tolerate. This is exactly what happened when the Bodine hammers suffered
'reliability' problems. Furthermore controlling the energy input at resonance was
important because during pile driving the system damping (the energy robbed by the soil)
would increase with depth, whereas the natural or resonant frequency would tend to
decrease. Thus the Bodine hammer would be forced to operate at lower energy when i t
required increased energy.
The second flaw in the Bodine technology was its inability to tune the system to
the natural frequency of the system being driving In fact attaching the Bodine hammer to
the system actually changed the fundamental or harmonic frequency of the system.
Without the ability to tune the frequency of the hammer it would invariably operate at
something close to the harmonic frequency, but rarely exactly at the harmonic frequency.
This would result in a loss of efficiency of the system. As it was the Bodine technology
relied upon the operator to adjust the throttle of the hammer motors to alter the frequency
of operation in an attempt to excite at or near the harmonic frequency. This is a crude and
inaccurate method.
Dr Bies left the Bodine Research group and became an accomplished Professor of
Acoustics at the University Of Adelaide, Australia. However he recognised the merit of
exciting a pile or similar system at its harmonic frequency and remained determined to
develop a better prime mover (motor). Over the next 30 years he attempted to develop
such a mover. In the early 1990's he and a graduate student by the name of Stewart Page
developed a new mover. This device proved to be modulated independent of the
frequency and was frequency tuneable. The problem was that they were acoustics
engineers and not geotechnical or construction engineers.
At the same time a manufacturer of foundation construction equipment,
Benninghammer Foundation Equipment Corp., was looking for a better means of
vibrating piles into the ground. The lead engineer at the company, the author, had a
background in soil and structural dynamics. Through the years they had heard about and
researched resonant or sonic pile driving methods but knew of no machine that could
operate at the power required to drive piles. Despite an active pursuit of such technology,
both internally and outside the company, they could not find any promising leads.
Eventually while in Australia selling technology, the author was contacted by the
Australians via e mail solicitation and visited their laboratory in Adelaide. The marriage
of true minds met no impediments1' and an agreement was struck to work together. A
problem arose with research and development capacity and funding at Berminghammer
due to other commitments and the author left to pursue the development of resonant
vibratory technology independently.
APPENDIX C: DESCRIPTION OF COMPETITORS
Per
form
ance
1 Tr
ends
Key
Str
engt
hs
(Cor
e co
mpe
tenc
ies)
Key
W
eakn
esse
s
Rev
enue
S
trea
m
Str
ateg
ic
Alli
ance
s
ICE
A
PE
r S
tron
g P
erfo
rmer
, lea
ds th
e pa
ck
in
the
mar
ketp
lace
, w
ell
esta
blis
hed
bran
d na
me
Mat
ure
in m
arke
tpla
ce
Larg
e si
ze
(can
ha
ndle
la
rge
proj
ects
) In
cum
bent
,exp
erie
nced
C
ompl
ete
rang
e of
pro
duct
an
d se
rvic
e of
ferin
gs-
truc
k dr
ills
to c
rane
mou
nted
B
road
dis
trib
utio
n ne
twor
k F
inan
cial
Res
ourc
es
Bra
nch
offic
es
thro
ugho
ut
the
wor
ld
Ove
rlook
sm
alle
r bu
sine
ss
oppo
rtun
ities
T
he
400
Lbs
Gor
illa
that
is
n't
tune
d to
m
arke
t an
d re
actin
g ap
prop
riate
ly
Sal
es a
nd R
enta
ls
Ser
vice
pac
kage
s R
epla
cem
ent p
arts
T
rans
port
of m
achi
nery
C
onsu
lting
ser
vice
s
Sev
eral
in
tern
atio
nal
allia
nces
Agg
ress
ive
grow
th
sinc
e in
cept
ion
13 y
ears
ago
M
arke
t lea
ders
hip
cont
ende
r G
aini
ng m
arke
t sha
re
Inno
vativ
e, h
old
seve
ral p
aten
ts
Ran
ge o
f pr
oduc
t an
d se
rvic
e of
ferin
gs (
even
con
duct
a P
ile-
driv
ing
Sch
ool)
Larg
e- s
ize
(eco
nom
ies
of s
cale
in
ope
ratio
ns)
Exc
elle
nt
grow
ing
dist
ribut
ion
netw
ork
Gre
at
web
pr
esen
ce-v
ery
wel
l m
arke
ted
Res
pons
ive
to c
usto
mer
nee
ds
Foc
used
on
mar
ket
lead
ersh
ip
posi
tion
a
Sal
es a
nd R
enta
ls
Ser
vice
pac
kage
s R
epla
cem
ent p
arts
T
rans
port
of m
achi
nery
C
onsu
lting
ser
vice
s
CA
T- p
ower
pla
nts
PD
A (
Pile
Driv
ers
of A
mer
ica)
Her
cule
s B
erm
ingh
amm
er
r S
tead
y gr
owth
Sm
all
to
Mid
- si
zed
Foc
used
on
la
rge
cont
ract
ors;
in
m
id w
est
US
A
Not
fu
ll se
rvic
e sh
op
Lim
ited
dist
ribut
ion
Sal
es
and
Ren
tals
S
ervi
ce
pack
ages
R
epla
cem
ent
part
s N
one
Fla
t gro
wth
, dec
line
Hig
h qu
ality
in
nova
tive
impa
ct
ham
mer
s an
d ac
cess
orie
s
Sm
all s
ize
Foc
used
on
im
pact
ha
mm
ers
Top
qua
lity
prod
ucts
, w
ith
pric
e po
int t
o m
atch
Nea
r ful
l- se
rvic
e sh
op
No
vibr
ator
y eq
uipm
ent
Poo
r dis
trib
utio
n ne
twor
k N
iche
in
nova
tions
an
d te
chno
logy
or
te
chni
ques
(n
umer
ous
pate
nts)
Sal
es a
nd R
enta
ls
Spe
cial
equ
ipm
ent
Rep
lace
men
t par
ts
Lice
nsin
g of
pat
ents
Als
o ow
n a
cons
truc
tion
com
pany
(t
est
new
pr
oduc
ts)
Per
form
ance
1 T
rend
s
Key
Str
engt
hs
(Cor
e co
mpe
tenc
ies)
Key
Wea
knes
ses
Rev
enue
Str
eam
Stra
tegi
c A
llian
ces
Vul
can
A w
ell
esta
blis
hed
bran
d na
me,
one
of
the
orig
inal
s M
atur
e in
mar
ketp
lace
Hug
e nu
mbe
r of
ham
mer
s in
mar
ket
Com
plet
e ra
nge
of
prod
uct
and
serv
ice
offe
ring
s-
truc
k dr
ills
to
cran
e m
ount
ed
Wel
l kno
wn
nam
e H
eavi
ly
netw
orke
d w
ith
cons
truc
tion
s fi
rms
in t
he S
outh
ern
US
Slow
to a
dopt
new
tech
nolo
gies
M
iss
oppo
rtun
itie
s be
caus
e th
ey a
re
not p
erce
ived
as
inno
vativ
e L
ow te
ch 'd
inos
aur'
prod
uct
line
Sale
s an
d R
enta
ls
Serv
ice
pack
ages
R
epla
cem
ent
part
s C
onsu
ltin
g se
rvic
es
Pile
Buc
k ne
ws
mag
azin
e
HP
SI
Flat
gro
wth
U
nexc
eptio
nal
-
Goo
d br
and
reco
gniti
on i
n th
e in
dust
ry,
esta
blis
hed
Exp
erie
nce
Mix
of
conv
entio
nal
ham
mer
s an
d vi
bros
Mid
dle
of t
he p
ack
Not
ag
gres
sive
in
defe
ndin
g or
gai
ning
m
arke
t sha
re
Und
iffe
rent
iate
d pr
oduc
ts
Sale
s an
d R
enta
ls
Serv
ice
pack
ages
R
epla
cem
ent p
arts
Not
kno
wn
MK
T
Flat
gro
wth
U
nexc
eptio
nal
Smal
l to
Mid
-siz
ed
Focu
sed
on
larg
e co
ntra
ctor
s;
equi
pmen
t is
hun
g fr
om a
cra
ne
Exp
erie
nce
Mix
of
co
nven
tiona
l ha
mm
ers
and
vibr
os
--
a N
ot f
ull s
ervi
ce s
hop
Und
iffe
rent
iate
d pr
oduc
t lin
e
Sale
s an
d R
enta
ls
Serv
ice
pack
ages
R
epla
cem
ent p
arts
Stro
ng r
elat
ions
hips
with
Mis
sour
i an
d So
uth
cent
ral
USA
dis
trib
utor
s
APPENDIX D: FORECAST FINANCIAL STATEMENTS
The following financial statements were created jointly by Peter van Engelen and
Matthew Janes throughout the second year of the Executive MBA program. Original
versions of the spread sheets were generated for the 2003, New Ventures EMBA 663
course. Subsequent versions were created for submission to the Telus New Ventures
competition. Final versions were created for a comprehensive business plan authored
largely Matthew Janes, but drawing upon the sources listed above. The financial
forecasts presented in this paper were largely synthesized by Peter van Engelen for his
final project titled "A Strategic and Financial Analysis of a Start Up Manufacturing Firm
in a Mature Industry" in partial fulfilment of his EMBA degree. Modifications to the data
entries have been made for this thesis generally reflecting the specific strategy and
insights revealed in this thesis.
Pro
ject
ed S
tate
men
t of
Cas
h F
low
s 20
1,
I I
,dV
W
I
~3
1 ~
41
Qll
Q
2 1 ~
31
Q4
1 al
l 4
2 1
~3
1 ~
41
Qll
Q
2 1
Q3 1
I IC
ash
flow
s fr
om (
for)
ope
rati
ng a
ct,iv
ities
: I
I Net
inc
ome
!cas
h fl
ows
from
(fo
r) o
pera
ting
act
ivit
ies:
I Cas
h fl
ows
from
fin
anci
ng a
ctiv
i
(+)
(+)
(+I-
) (+
I-)
(+I-
) (+
I-)
(+I-
) (+
I-)
(+I-
)
Am
orti
zati
on
Dep
reci
atio
n D
ecre
ase
(inc
reas
e) in
acc
ount
s re
c D
ecre
ase
(inc
reas
e) i
n in
vent
ory
Acc
ount
s pa
yabl
e an
d ac
crue
d lia
b A
ccru
ed l
iabi
liti
es
Pre
paid
exp
ense
s O
ther
pay
able
s C
orpo
rate
taxe
s pa
yabl
e C
ash
flow
s fr
om o
pera
ting
act
it
(+I-
) (+
I-)
(+I-
) (+
I-)
(+I-
) (+
I-)
(+I-
)
I Incr
ease
(de
crea
se) i
n ca
sh
Sho
rt-t
erm
deb
t L
ong-
term
deb
t E
xtra
con
trib
utio
n Is
suin
g pr
efer
red
stoc
k O
ther
long
-ter
m li
abil
itie
s Is
suin
g co
mm
on s
tock
A
dvan
ces
to d
irec
tors
C
ash
flow
s fr
om f
inan
cing
ac
ti~
(+I-
) (+
I-)
(+I-
) (+
I-)
(+I-
)
Cas
h, b
egin
ning
of
year
C
ash,
end
of
year
Cas
h fl
ows
from
inve
stin
g ac
tivil
Sal
eIP
urch
ase
real
est
ate
Sal
eIP
urch
ase)
mac
hine
ry &
equ
ip
Lon
g-te
rm in
vest
men
ts
Ren
tal
flee
t G
oodw
ill
etc
Cas
h fl
ows
from
inve
stin
g ac
tivi
RTI Ratio Analysis
Capitalisation I Total Liabilities 1 Total Assets 0.061 0.251 0.261 0.371 0.21 Debt Service EBITDA / Interest Expense EBITDA / (Intr. Exp. + CPLTD) Total Debt / EBITDA Total Debt / TNW
NA NA
0.00 0.00
136.1 1 42.61
0.16 0.13
232.48 112.57
0.04 0.04
NA NA
0.00 0.00
NA NA
0.00 0.00
Equipment Joint Venture Financial Forecasts
The following assumptions are made regarding the forecasts for the Equipment Joint
Venture:
The company is held jointly, with 49.9% control by RTI and the 50.1 % split between the
Distributor and an angel investor. This structure will create a scenario where the
distributor does not have ultimate power, nor does RTI. The angel will act as a mediating
influence between RTI and the Distributor.
Sales Scenario
Sales to exclusive Distributor @ $45.5M/Unit (small) to commence and then increasing by 3% per year starting in Q l of the next year
Sales to exclusive Distirbutor @ $160M/Unit (2005 = large) to commence and then increasing by 3% per year starting in Q l of the next year
In 2010 commence decreasing rental pool by 10% of hammers due to obsolescence.
Under this scenario:
Owners inject $250M in 4 4 2004 Owners inject $2000M in Q4 2008
Preferred shares issued to outsiders for $250M in Q4 2004 Preferred shares issued to outsiders for $ IOOOM in 4 4 2005 Preferred shares issued to outsiders for $3500M in Q l 2006 Preferred shares issued to outsiders for $1500M in Q l 2007 Preferred shares issued to outsiders for $7000M in Q l 2008 Preferred shares issued to outsiders for $2500M in Q l 2009 Total from Distributor/Founders/Angel =$15,75OM
BankJAsset backed lender financing for $3500M in Q1 2007 BanWAsset backed lender financing for $7000M in Q l 2008 BanWAsset backed lender financing for $13000M in Ql 2009 BanWAsset backed lender financing for $8000M in Q 1 20 10 Total from Bank / Asset backed financing Co. = $3 1,500M
Depreciation and Amortization taken at the CCA rate for simplicity (re: Def. Taxes)
l~inancial Forecast
Inventory Prepaid Expenses Other Current Assets Total Current Assets
Long-term Assets Real Estate Machinery & Equipment (gross) Accumulated Depreciation Due by Officers & Affiliates Long-term Investments Rental Fleet Accumulated Depreciation Goodwill & Other Intangible Assets Accumulated Amortization Total Long-term Assets
I Total Assets
Liabilities & Equity Short-term Bank Loans Accounts Payable Accrued Expenses Other Payables Income Taxes Payable Due to Officers & Affiliates Dividends Payable Current Portion of Long-term Debt Total Current Liabilities
Long-term Debt Other Long-term Liabilities Deferred Income Taxes Redeemable Preferred Shares Total Long-term Liabilities
I Total Liabilities
Common Shares Preferred Shares Other Contribution Retained Earnings Total Equity
l ~ o t a l Liabilities & Equity
Cquipment Joint Venture Balance Sheet 2004 1 2005 1 2006 1 2007 1 2008 1 2009
i I I I I I
Cas
h fl
ows
from
Ope
rati
ng a
ctiv
itie
s
I Net
inc
ome
(+)
(+)
(+I-
) (+
I-)
(+I-
) (+
I-)
(+I-
) (+
I-)
(+I-
)
Cas
h fl
ows
from
Ope
rati
ng a
ctiv
itie
s A
mor
tizat
ion
Dep
reci
atio
n D
ecre
ase
(inc
reas
e) in
acc
ount
s re
ceiv
a D
ecre
ase
(inc
reas
e) in
inv
ento
ry
Acc
ount
s pa
yabl
e an
d ac
crue
d lia
bilit
ie
Acc
rued
lia
bilit
ies
Prep
aid
expe
nses
O
ther
pay
able
s C
orpo
rate
tax
es p
ayab
le
Cas
h fl
ows
from
ope
rati
ng a
ctiv
ities
(+I-
) (+
I-)
(+I-
) (+
I-)
(+I-
) (+
I-)
(+I-
)
I Incr
ease
(de
crea
se)
in c
ash
Cas
h fl
ows
from
fina
ncin
g ac
tiviti
es:
Shor
t-te
rm d
ebt
Lon
g-te
rm d
ebt
Ext
ra c
ontr
ibut
ion
Issu
ing
pref
erre
d st
ock
Oth
er l
ong-
term
liab
ilitie
s Is
suin
g co
mm
on s
tock
A
dvan
ces
to d
irec
tors
C
ash
flow
s fr
om fi
nanc
ing
activ
ities
(+I-
) (+
I-)
(+I-
) (+
I-)
(+I-
)
I Cas
h, b
egin
ning
of
peri
od
Cas
h. e
nd o
f ~
eri
od
Cas
h fl
ows
from
inve
stin
g ac
tiviti
es:
Sale
IPur
chas
e re
al e
stat
e Sa
leIP
urch
ase)
mac
hine
ry &
equ
ipm
en1
Lon
g-te
rm in
vest
men
ts
Ren
tal f
leet
G
oodw
ill e
tc
Cas
h fl
ows
from
inve
stin
g ac
tiviti
es:
Pro
ject
ed S
tate
men
t of
Cas
h Fl
ows
2004
20
05
2006
20
07
43
1 4
4
Qll
4
2 1
43
1 Q
4 Q
ll
42
1 43
1 4
4
Qll
Q
21
43
1 4
4
DY -
9
E.
-
~lrrerl~ Ratio NA 1 174.91 9.21 2.41 2.21 2.01 2.5 uick Ratio NA 1 174.21 n nl a a1
Key Ratios All data in ($000~)
'orking Capital $5001 $8971 9
kquipment Joint Venturt 20041 20051 20061 20071 20081 20091 2010
Capitalisation I Total Liabilities 1 Total Assets 0.00l 0.001 0.021 0.391 0.431 0.471 0.39
BIBLIOGRAPHY
1 Statistics Canada, web search section /~tt~~://~t~~vn~..st~~t~~~111.~~~:8096 and related articles, June, 18, 2003. 2 US Census Bureau, US Department of Commerce, Annual Survey of Manufacturers, Value of Product Shipments: 2001, MOl(AS)-2, January 2003.
Engineering News Record, http://enr.construction.com/prod~~cts/equipTrackTrends Construction volumes and market trends, May, 13, 2003 4 Dodge Construction Reports, htt~://dod~c.co~~structio~i.cc~~n/Re~orts, Market trends, Forecasts, Jan 15,2004.
~ e o r d i e Compton, Director, Deep Foundations Institute, Correspondence Hotel Vancouver, Jan 151h, 2004, Organising Committee mtg for the DFI annual conference Sept 28,2004
Scott Litke, Director Association of Drilled Shaft Contractors, Telephone conversation June 5th, 2003.
Porter, Michael, E., Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: The Free Press, 1980.
Porter, Michael, E., Competitive Advantage: Creating and S~istaining Superior Per$ormance. New York, The Free Press, 1985.
Hamel, Gary & Prahalad,C. K., Cornpeting for the Fclture. Harvard Business School Press, 1994. ' O Porter, Michael, E., From Competitive Advantage to Corporate Strategy, Hanard Business Review, May-June 1987, pgs 43-59. I ' Evans, W ., Lane, H., & O'Grady, S., (1992). Border Crossings: Doing business in the US., Canada, Webcom. 12 Shakespeare, William, The Sonnets, No 116, paraphrase.