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

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extended essay (the title of which is shown below) to users of the Simon Fraser

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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

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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.

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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.