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the construction industry.

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Xavier Bourret Sicotte, Canupsorn Chairatna, Hang Dong, Nader Kaheil, Zhengda Li, Hamza Shaikh

17/12/2010

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-./&01+23&Bolting Block is a revolutionary system that will be valuable to the construction industry as it is simpler, cheaper and stronger than conventional concrete blocks. Bolting Block consists of 3 parts: A block, a bolt and a bar and the block is sandwiched between two metal bars bolted together. As no masonry is involved, a

and requires no experience or skill in construction. The initial target market will be DIY construction and landscaping e.g. constructing temporary garages or storage spaces, but we forecast a widespread usage in a range of applications ranging from professional contractors to aid and disaster relief.!

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Bolting Block system consists of three major parts: a concrete block, metals bars and bolts. The concrete blocks are 400mm x 200mm x 200mm in size, the bars are 200mm in length, 20mm in width and 10mm in thickness, and the bolt is 210mm long with a diameter of 8 mm. The blocks have recess pocket which allows the system to be connected mechanically in the following way:

- A block is sandwitched between two metal bars - The bars are bolted together through the block - Another block and bar are layed on top, and bolted through the second block

to the bar bellow.

This system provides post tensioning, which gives strength to the structure in both vertical and lateral direction hence is stronger than conventional masonry. Constructing a wall using Bolting Block does not require mortar, which means it saves time, requires little skills, is environmentally friendly and can be used in cold countries. The construction process can be speeded up even further by using double or triple bar which expands 2 or 3 blocks respectively. On top of that, all parts are reusable and can be taken apart easily.

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To better understand the implications of our new technology and what customers, markets and situations would best benefit from it, research initially focused on a small scale, personalised analysis. This involved interviewing professionals and entrepreneurs, industry experts and academics, and construction workers to get a better sense of how our product could be used, and where. The summary of this qualitative market research is given in table 1:

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Professionals & Entrepreneurs

Industry Experts & Academics

Construction Workers

Not technically suitable Unwilling to change existing process and operations Sceptical of long term resistance

Enthusiastic about possible applications in developing countries with shortage of skills Variety of applications in military, governmental, temporary, disaster aid, seismic environments

Attracted by practical, user-friendly features. Were interested in using it themselves to built their own house extension. Would mention it to friends with little masonry experience as an alternative to using contractor

It appears from the interviews that professionals and entrepreneurs are sceptical about the product and need more proof before considering using it. Academics are attracted to the socio-economical impacts of the technology and believe it has potential. Lastly, several construction workers raised the idea of using Bolting Blocks in the Do It Yourself (DIY) industry as its simplicity made it a good alternative for people with little masonry skills.

Further analysis confirmed that the DIY market is particularly attractive to serve as an initial customer base because Bolting Blocks offers a cheap, simple and attractive solution to the problems associated with building a house extension, garage, pool house or garden walls. Indeed, many people are reluctant to pursue such projects themselves as it requires making mortar and cement, which is dirty, time consuming and difficult for those with little experience.

The second stage of the market analysis investigates the size, segmentation and other relevant insights on the DIY and house extension market in the UK.

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a gradual fall since 2004. However, as incomes and buying power have decreased due to the recent economic crisis, the next few years should be a good time to encourage more DIY activity with the introduction of innovative products.

According to a recent Mintel UK market report, 6% of households consider building a housing extension and 1% have installed one over the past 12 months. Moreover, 32% of people would consider DIY solutions for bricklaying and masonry. Combined, these figures yield a market size estimation of 80 000 households/year1!willing to buy a DIY solution for their masonry/housing/extension work in the UK. This is most likely an underestimation of the total DIY market available for Bolting Blocks as it does not consider households that would decide to build an extension based on the attractiveness of our product.

Another particularly attractive market is that of gardening, landscaping, neighbour separation and other kinds outdoor walls. The estimation of the size of this market is based on the number of households with the following specifications:

More than 1 person2 Owned or mortgaged3and

not social housing and With a garden

This leads to an approximate estimation of 9m households potentially interested in the outdoor gardening and landscaping applications of Bolting Blocks in the UK.

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Most northern, developed countries have a potential market similar to that in the UK because the problems and requirements of users will be similar in those countries. Although they differ in size, we estimate similar market characteristics and attractiveness for Scandinavia, North America, and Northern Eastern Europe, with a particular interest in Sweden, Norway and Finland, where people generally have little masonry experience.

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In addition to the actual size and segmentation of the DIY market, it is useful to gain an understanding of the behaviour and mind frame of consumers so as to better promote and sell our product.

A key question to ask is what motivates people in undertaking a DIY project4

This study highlights the role of DIY as a cheaper alternative as the main source of motivation. Gaining a satisfaction from the learning process and implementation also plays a significant role and should be considered during our marketing campaign.

Other insights found from the research are that 30% of adults lack the confidence to do any DIY5 while browsing stores for ideas is one of the most popular sources of inspiration for DIY consumers. The young (under 25s) in particular, rate superstores

confidence to tackle a wider range of DIY tasks and present them with new, innovative opportunities.!

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Since Bolting Blocks is an innovative product, its main competitor will be the pre-existing technology of mortar and cement construction. However, there also exists 4 different mortar-less building systems in the market and all are based in North America. Of these, Haener Block and Sparlock Systems are our most significant competitors as their products are already used and established.

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System Year established Threats Haener Block 2007 Well established as a low-cost DIY

product in the US. Wholesale price (20k+ blocks) is very low at $1.75 per block.

Sparlock System 1999 Reputation as an eco-friendly product. Has licensees in 20 countries. Well established in the North American

market.

Our advantage over these systems lies in the design of our product. Bolting Blocks is the only mortal less system to make use of unitized post-tensioning, which is the concept of bolting the blocks together. This makes our product stronger, more flexible and easier to use.

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Bolting Block ® will initially choose to subcontract the manufacturing of all materials, components and packaging required. The products will then be sold through existing retailers that are already well implemented in the market. We aim at transporting the blocks and metal directly from the manufacturers to the retail stores so as to minimize the necessary storage and intermediaries.

This approach was chosen because Bolting Block Company does not have the experience, knowledge and scale necessary to produce commodities such as concrete blocks and metal bars and bolts efficiently. In fact, we believe the cost per unit of our product is lower when subcontracting the manufacturing because such companies operate on very large scale and small profit margins. Also, the investments required to purchase machinery and produce the blocks would greatly increase the time before commercialization and make raison capital more difficult.

Similarly, it is more viable to sell bolting blocks through pre-existing retail channels as these have good access to consumers, sales force, infrastructure and experience. We aim at accessing a large portion of available consumers and sell large volumes at reasonably low price. From the market research conclusions and considerations of the nature of our product, we believe consumers are unlikely to travel, research, or pay a high price for Bolting Blocks, which explains the necessity of having multiple selling sites.

Finally, owning as few transport facilities, infrastructure, machinery and retail sites as possible means that the initial investment required for Bolting Block to operate is minimised. Moreover, the low operating cost of this model guarantees a rapid payback on investment and low risk. Revenues can rapidly contribute to profits despite the lower margins.

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On the other hand, there are risks and disadvantages that need to be taken into consideration. For example, we are bounded to find suppliers and retailers willing to cooperate with us. This may reduce our profit margin and limit our growth. This approach will therefore require extension work to find agreements and sign contracts pleasing all parties and protecting us from defaults and major risks.

Another issue arises from the lack of storage space and buffer in case of rapid change of inventory volumes. As stocks are small to lower the exposure and risk, retailers may run out of blocks or be left with unsold ones, which would cost us and harm our relationship with the retail company. The logistics and planning which including quality checking, sales prediction, packaging etc must be efficient and well coordinated to avoid these problems.

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Bolting Block ® will therefore control several parts of the value chain; Research, Development and Marketing. Our complementary assets are

Innovative technology, patents and design

Certifications and construction permits

Marketing creativity

However, we have limited control over the production and distribution aspects of the chain, which is the main weakness of our business model. In order to justify our strategic choices it is important to understand which of these complementary assets we do not control are most important for creating value.

Manufacturing

Bolting Blocks is a simple product to manufacture in terms of materials used, fabrication and complexity of the technology. There are a large number of companies with the expertise and facilities necessary for the manufacturing of Bolting Blocks as long as they are given the required specifications. As a result, not controlling manufacturing and scale assets is not a threat to our model as these are not tightly held by any single entity.

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Distribution

On the other hand, distribution and retailing of Bolting Blocks is of great importance in the value chain, as retailers will play a key role in the packaging, logistics and selling of our products. In order to change habits and pre-conceptions of our product, we need the cooperation of retail sales agents. These are generally considered to be

can have a strong impact on our sales. The short-term success of Bolting Blocks will therefore be closely linked to the willingness of retailers to provide the necessary exposure, positive reviews and advice and support services to both our product and our company. In the long term, we may aim at moving away from this reliance on retailers so as to gain more control over these vital complementary assets.

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As a result, our most valuable complementary assets are patents and certifications in the UK that protect us from competition and guarantee the high appropriability or our product. Distribution and retail also play a key role and substantial efforts will need to go in securing control or cooperation with companies possessing such assets. Such cooperation would enable Bolting Blocks to move further into the highly profitable region of the Teece model and would provide us with opportunities to create more value.

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Due to the importance of retail and manufacturing companies and contracts in the success of our business model, the following section will describe the balance of force, the pros and cons of different possible contracts and the criteria on which we will base our choices of companies to work with.

It is valuable to keep in mind the balance of forces when dealing with manufacturers and retailers and signing contracts with them. This will influence the terms of our agreements with them and can have a strong impact on the profitability and success of our business.

Generally, we can assume that these companies feel they are in a dominant position because they are already well implemented in their businesses and do not need our product to continue to be profitable. Moreover, we imperatively need to work with them to operate and their support and cooperation would have a strong positive impact on our profitability. The added complexity and costs caused by the different specifications, volumes, delivery and logistics requirements of Bolting Blocks could also weight in favour of subcontractor.

Nevertheless, there are a number of arguments that we can use to strengthen our position during negotiations. There are several competing firms in the market for both manufacturing and retail and any of these will be eager to gain new clients over its peers. Our product is innovative and will create a new market: attracting customers and causing a switch from the old technology to ours. Companies working with us will benefit from this and will avoid losing customers to their competitors. Moreover, the ownership of patents and certifications strengthens our position in the value chain and there is limited risk of a similar product being sold elsewhere. Finally, the companies we chose to work with will benefit from our strong promotion and marketing, as we may be willing to include their brand name in our campaign.

Analysis of contracts and relationships with different parties

Although Bolting Blocks has pre-agreements with a number of parties, we aim at obtaining the most favourable contracts as possible and need to find the best compromise between the available alternatives. The next table summarises the pros and cons of the most important strategies:

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Advantages Disadvantages Single supplier/ retailer

Lower prices because of larger volumes and discounts. This allows greater profit margin for Bolting Block. Operational time and cost are minimized, as there is only one party to deal with. Easy to manage and keep track of the goods. Opportunity of developing exclusivity agreements, shared goals and greater sinergy

Dependency on a single party puts us at great risk if it defaults or goes bankrupt, as we have no alternatives. Single party may be unwilling to change conditions and hold us captive. This restricts our flexibility to make use of new opportunities. Eg: new technology at competing supplier halves costs. Need to maintain a good relationship with the supplier to ensure success. Distribution of goods may cause problem if the supplier has only one manufacturing site. This means the goods have to travel great distance before arriving at the retailer hence greater cost.

Multiple suppliers/ retailers

Reduce the risk of shortage of supply. Distribution time can be minimized if the suppliers are spread out. i.e. one in the north one in the south. Short-term contact can be made to ensure flexibility and that the contract benefits us the most. This way we can sign new contract with other suppliers who are willing to supply at lower price.

Higher cost relative to single supplier due to the diseconomies of scale. Operation time and cost are increased. Distribution process and strategy is more problematic. Greater variation of the products. This could lead to quality and assembly problems: i.e. the blocks do not fit together properly.

Long term

Benefit from lower price. Greater protection against volatility in raw material cost. Strategic planning can be made years in advance since the cost can be fixed.

Supplier might decide to change its strategic behaviour in the long run and this could lead to negative impact. Sticking with the long term contract may damage the competitiveness if other suppliers can offer a better deal. i.e. due to theirs economies of scale or technological advanced in production method.

Short term

Allow greater elasticity of supply. Provide the ability to obtain the best contract at the time.

Short-term contracts are signed at higher price. Negotiation for new contracts requires time and cost. Failing to obtain the contract in time may results in the shortage of supply.

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Criteria for choice of companies

We will base the choice of suppliers and retailers to work with on a number of criteria including:

Price and terms of agreements Size and capacity: number of sites and their localisation Supply time and delay before output Presence on international market, opportunity for future collaboration Other; infrastructure, transport,

Generally, we hope to work with large companies over local ones as we believe these have a number of advantages such as:

Available excess capacity that can be used to increase production in case the demand of Bolting Block System increases in the future.

Transport and packaging infrastructure and facilities (trucks, drivers, logistics) Numerous site locations that can minimise transportation distance and costs Greater economies of scale and impact and presence on the market, both

domestic and international Better known brand image, greater experience and expertise from which we

can draw upon.

Preliminary list of suppliers and retailers in the UK

The following table shows a selection of potential suppliers and retailers for our product in the UK.

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Block Bolt Bar Hanson UK TR Fastenings ADS Metal Service Tarmac Smithbullough Merseyside Metals Masterblock IEbolt Brindley Metals H+H UK William Johnston West Yorkshire Steel Cemex STF Fasteners Kiveton Park Steel

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DIY No. stores Builders Merchant No. stores B&Q 321 Travis Perkins 600 Wickes 190 Jewson 500+ Homebase 300 Build Base 138 Focus 181 Build Center 200+

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We have selected a short list of one company in each category that corresponded the most to our criteria to begin preliminary negotiations. Hanson UK, for example, is chosen because it is the leading supplier of building materials in the UK. It has over 350 manufacturing sites over the country and is capable of delivering the goods with short lead time. Moreover, Hanson UK is part of Heidelberg Cement Group which operates in 40 countries worldwide and may provide future business opportunity for Bolting Block as it can facilitate the implementation of our business model in other countries.

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The following table summarises the various threats and responses that are part of our protection strategy

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Threat Response UK block manufacturers or retailers could create a similar product and use their scale and assets to crush our start up

Extend our patent portfolio to guarantee protection. Commercialise the product and gain brand image and customer appreciation

Companies selling normal concrete blocks may try to drive us out of business by significantly reducing their price, becoming unprofitable for a short period but relying on their size and other revenues

We must convince customers of the benefits of our system over others. Market our product and educate customers of the added value of Bolting Block. Create demand for something that does not exist yet.

A US based mortal-less company establishes itself in UK.

Establishing long-term contracts with retailers may delay the arrival of US based competitors. Our system will have a foothold and our

with our system, reputation, popularity and product design. (First mover advantage)

Generally, we will rely on patents, first mover effect and agreements with retails and manufacturers to protect us from competition

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Vision

We believe the marketing and promotion of Bolting Blocks will be a key driver of sales because it addresses several of the main barriers to entry. These are:

The reluctance of customers to switch to a new, unknown technology. The lack of public knowledge and recognition of our product; no brand name The misunderstandings on what our product can be used for. The lack of experience of consumers in masonry and construction

The marketing strategy will therefore aim at demystifying, educating and convincing potential consumers. It will take place in two different environments, the DIY and the professional market, but a special focus will be given to DIY as we believe this segment contains the majority of Bolting Blocks initial lead users. The marketing plan is devised in two; standard advertising and Innovative and Viral marketing.

Standard Advertising

This consists of television, Internet and magazine advertisements aiming at increasing customer awareness of our product. It is easy to design and implement and requires low involvement and operating costs. The drawbacks of these methods are the low effectiveness and the high costs of buying advertisement space in media.

Innovative marketing and advertising

This will be the main focus of our campain and can be divided into three different types

On site advertisement:

Consists of stands showing Bolting Blocks and their usage at retail stores. This can be done with through videos and screens, or by showing a wall being built and deconstructed by an employee. The aim is to show, in an interactive and interesting way, how simple and intuitive Bolting Blocks are. Such stand can attract potential consumers through a number of factors; the price saving, the simplicity of the

performance emphasize all these points so as to gain maximum effectiveness.

Marketing through reviews, events and awards

To rapidly gain recognition, a team will be focusing on developing Bolting Blocks brand image by:

- Sponsoring events, fairs and TV shows - Promoting consumer and editorial reviews on the product - Registering and competing for awards: e.g. NY times innovation award - Promoting word of mouth advertisement in the construction industry

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Online, media and viral marketing

The final aspect of the campaign will involve innovative and web based forms of marketing. This will first involve developing a well designed, attractive website providing all necessary information and serving as the main tool for educating and convincing consumers. Other methods could include online viral videos and interactive competitions with users: e.g. Post a video of a creative use of Bolting Blocks and win a prize!

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It can be argued that Bolting Blocks should lease its technology, as its current business model does not control the production and selling aspects of the value chain. However, we believe our team is more motivated, creative and efficient in developing patents, obtaining certifications and marketing the product. This model allows us to keep control over the vital aspects of the value creation process in which we have a competitive advantage while allowing manufacturing and retail companies to apply their own complementary assets to our benefit. This results in a highly efficient and risk free business as long as it takes place within a cooperative environment.

With this in mind, we can devise the general strategy for Bolting Blocks Company and make sure we concentrate on what creates the most value while keeping tight control on the risks and disadvantages of our model. Our focus points are:

Extending our patents, certifications and design portfolio Negotiating strong, advantageous and risk free contracts Designing an impactful marketing campaign to raise awareness and

understanding of our product, change preconceptions and support sales Researching and understanding the market needs and developing new

products and applications of Bolting Blocks: e.g. defence, humanitarian Slick and efficient operations based on the just in time model. This will require

good predictions of supply and demand and a rapid adaptation to changes Developing new markets in Scandinavia and North America

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J./&?"*"@%;%*+&"*7&!%";&Bolding Block will initially be lead and owned by its three fownders, which are also owners of the patents. Together, the founders have experience and expertise as a civil engineer, an entrepreneur in the construction industry and a lawyer. Due to the limited resources in the early stages, the company will aim at hiring 3- 5 full time employees initially, and outsource in the most cost effective manner.

The company will adopt a flat matrix structure to emphasise knowledge sharing, and flexibility in the decision making process. Although each vertical section can function independently, important decisions and strategies will be made as a non-hierarchal group.

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Legal, Operations and Management/finance will be lead one of each founder, but the lack of expertise in Marketing, IT and support coordination requires hiring new team members. A particular attention will be given to to finding a dynamic and innovative leader for the marketing division of the company.

Management, Finance Accounting

IT services

Support functions, Coordination

Marketing Advertisement, website,

sponsorships

Operations Supply, demand,

logistics,

Legal Patents, Certifications,

Contracts

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The final price of the product at retail stores is estimated to be 5£ per unit, which is above the price of basic concrete blocks and of competing block systems. The reason the price is higher is because of the singinificant added value brought by Bolting Blocks in terms of time gain, simplicity, satisfaction and overal costs. Comparative analysis shows that the cost of building a 4m2 wall using

- A contractor is approximately = 1500£, - Buying own material and hiring labor = 450£ - Bolting Blocks at 5£ / unit = 200£

We our confident that our marketing compain will be able to convince potential consumers of the benefit of using our system and believe 5£ is an optimal price. The number 5 is easy to remember and use in mental calculations and this price allows us to remain profitable even in the case of poor sales and weak contractual agreements with manufacturers and retailers.

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Initial estimations of cash flows related to producing, distributing and selling a unit of our product are shown in table 7 for three different scenarios:

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(£) / unit block Optimistic Base Pessimistic Manufacturing cost - 1 - 1.75 - 2

Retailing cost - 1 - 1.75 - 2

Operating cost - 0.5 - 0.5 - 0.5

Price sold + 5 + 5 + 5

Profit + 2.5 + 1 + 0.5

Profit Margin (%) 50% 20% 10%

The profitability of our model will be most sensitive to the pricing agreements with manufacturing and retailing parties. Generally, the manufacturing costs will decrease with volumes, but the share given to retailers will likely remain the same.

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development, patents and building certifications of Bolding Blocks in the UK. Additional funding is required to pursue the strategic targets described previously, in particular extending the portfolio and commercialising the product.

expectations and habbits for the success of our product, the major part of raised financing should be used in marketing and advertisement. Assuming patents and certifications are obtained and that we sign good agreements with the companies, we believe the sales in the first 2 years will be strongly related to the amount spent on marketing. As a result, we predict two different scenarios for our financing strategy within a time frame of 5 years

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The first scenario (Blue) requires a large initial investment of 500 000£ of which 100k will be used for set up and operations and 400k for marketing. This will strongly increase sales and we estimate the breakeven point to happen within 1.5 years, (1 year after commercialisation). Considering only the DIY house extension market, we aim at capturing 10% of the market in the first year, and selling an average of 100 blocks / customer, resulting in approx 4M revenue and 800 000£ profits.

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The second scenario (red) involves a much smaller investment of 100 000£ which will be used entirely for set up and operations. The corresponding sales will be slower but the risk and exposure also. A second round of investment at the end of the first year can then be used for better marketing, which will lead to an increase in sales. Following this approach will result in slower growth but also decreases risk and helps securing investment.

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The reletively small initial investment required for Bolting Block to operate and commercialise its product in the UK ( scenario 2) means we are in a position of strengh when securing our first round of financing. We do not need to rely on large investment from venture capital or angels and aim at securing the most attractive source of investment as possible. This would involve a partnership, joint venture, or equity investment from on of the manufacturing or retail companies we will work with. Such a deal would be particularly attractive as it would guarantee the cooperation of a party controling important assets in the value creation process. In particular, an investment from a large DIY retailer would be optimal as it would create synergy in marketing, logistics and strategy targets and would be beneficial for all parties.

Following this approach would also open the possibility for a buy out of fownders shares in the long run, once these believe their product has been sufficiently well implemented in the market.

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