NewCo Business Model PwC Document April 20, 2000 Draft for discussion purposes only
Objectives Meeting Objectives • Validate Assumptions • Make Key Decisions • Agree on essential elements of CEO presentation
Agenda 12 :00 - 12 :05 Section 1 Introduction Randy Johnson 12 :05 - 12 :10 Section 2 Strategic Issues facing Industry Doug Hayhurst 12 :10 - 12 :20 Section 3 Industry segments Nick Checota 12 :20 - 12 :35 Section 4 Customer Points of Pain Wilson Haddow 12 :35 - 2 :45 Section 5 The Solution 12 :35 - 12 :40 Section 5.1 Service offerings Wilson Haddow 12 :40 - 12 :50 Section 5.2 Functionality required Wilson Haddow 12 :50 - 1 :00 Section 5.3 Technology David Carter * 1 :00 - 2 :00 Section 5.4 Positioning Nick Checota * 2 :00 - 2 :45 Section 5.5 Value Proposition for key constituents Alistair MacCallum 2 :45 - 2 :50 Section 6 Governance Beth Trent 2 :50 - 3 :00 Section 7 Marketing Rollout Andy MacCallough 3 :10 - 3 :15 Section 8 Financials Frank Doorley 3 :15 - 3 :25 Section 9 Organization and Staffing Randy Johnson 3 :25 - 4 :00 Section 10 Next Steps Doug Hayhurst and Randy Johnson *Key Points
Table of Contents Section 1 Introduction 1.1 Mission and Vision 1.2 Opportunity and Risks 1.3 Keys to Success 1.4 Concept and Strategic Approach 1.5 Key Participants and Other Stakeholders 2 Strategic Issues Facing the Industry 3 Chosen Industries and Customer Segments 4 Points of Pain for Customer Segments 5 The Solution 4.1 Service Offerings of the Marketplace 4.2 Functionality Required 4.3 Technology 4.4 Positioning Model 4.5 Build versus Buy/Alliances 4.6 Value Proposition for key Participants 6 Governance (includes Organization) 7 Marketing Rollout 8 Financials 9 Organization and Staffing
Section One 1 Introduction
Mission and Vision Mission NewCo will become the industry marketplace, promoting market efficiency and meeting the broad needs of industry serving producers, customers and affinity partners across market segments and geographic areas. Vision To achieve broad industry usage as quickly as possible by providing value and efficient solutions. Key Assumptions • Launch within 6 months • Profitable within 2 years
Opportunities and Risks Opportunities 1. Period of transformation in the marketplace ripe for value creation. 2. Shape the future of the industry. 3. Increase customer intimacy. 4. First mover advantage. 5. Large players will attract other key players. Risks 1. Benefits will only come with huge process and people changes in the organizations. 2. Large costs to integrate marketplace to backend ERP systems with significant uncertainty regarding outcomes. 3. Risk that Founding Partners will lose customers to more efficient supply chains. 4. If NewCo does not move with sufficient speed some one else will.
Keys to Success Compelling value proposition: Must offer stakeholders value they can not otherwise achieve, through increased efficiencies or creation of new sources of value. Speed to market: A good idea is not enough. Must be the first to stakeout its territory and lay claim to customers. Speed to scale: Maximize efficiencies through scale. Commitment: The rate of change requires in e-business places significant stress on an organization and success requires a significant degree of commitment. Communication: Information sharing among stakeholders is essential to accurately identify marketplace and opportunities for value creation. Neutrality: Marketplace must be perceived as being as neutral and not biased towards founders to attract other industry participants. Adaptability: The e-business sector is rapidly changing: successful e-businesses must be able to adapt quickly to evolving marketplace demands. Liquidity: Speed, scale, commitment and adaptability require significant ongoing investment.
Concept Concept Create a single technology platform through which customers can access the entire range of products, services and desired functionality to enable them to transact business in the paper, building materials and packaging segments of the industry. The NewCo Site will enable all users -- industry suppliers as well as customers and affinity partners -- to achieve transformational change in their business models resulting in greater market efficiency.
Strategic Approach • Strategic Approach • Identify high potential industry segments and customer segments. • Develop a business model that addresses critical customer points of pain in key market segments. • Identify key services and functionality needed to address the customer points of pain. • Identify opportunities to accelerate speed to market and scalability. • Partnership with entities that can provide significant resources to develop a marketplace. • Partnership with companies that produce key technology benefits • Acquisition of existing e-businesses in strategic market segments or that have key functionality • Alliance with affinity partners • Build core high core potential verticals and functionality first and develop additional offerings on a continuos basis.
Value Proposition By creating the leading site for functionality businesses in the forest products industry in a timely, cost-effective manner that better meets customer needs. The Founding Partners will create closer, stronger ties to customers and many of the key participants in the forestry products industry. As a result the Founders will have the ability to significantly improve their supply chain processes. In addition to the potential efficiency benefits, each of the founders parties organization, NewCo has the potential to provide substantial benefits in the form of potential revenues from NewCo operations and gains in the event of an IPO.
Participants and Stakeholders Participants: • Founding Partners • Georgia Pacific • International Paper • Weyerhaeuser • Potential European Gold Members • UPM-Kymmene • Stora Enso • Smurfit-Stone and Jefferson Smurfit Group • Sappi Other Stakeholders • Other Industry Producers • Customers • Strategic Affiliates • Affinity Groups • Potential Channel Partners
Section Two 2 Strategic Issues Facing the Industry
Target Return - 12% U.S. Global Canada Strategic Issues Facing the Industry 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% 1995 1996 1997 1998 1999E Source: PricewaterhouseCoopers
Strategic Issues Industry Drivers • Poor Financial Performance • Fragmentation of suppliers. • Cost Pressures • Global Customers • Technology New Industry Influences • Ebusiness portals/exchanges = new business models • Customer demands (e.g. big box stores) • Customer preferences (shrinking newspapers) • Hancock • Enron • Environment and Certification
Section Three 3 Chosen Industries and Customer Segments
Industry Selection Within the forestry products, three main industry segments have been selected to be addressed on the site. • Paper Products • Building Materials • Paperboard These three industries were chosen because they represent the greatest opportunity and are the largest portion of the business for the charter members. • Selected Industry segments tend to have certain key characteristics • High-level of order frequency • Fragmented customer base • Difficult fulfillment process • Lack of information transparency • Separation from the end customer • Lack of system Integration -- providing shared cost, shared risk web interface.
Identification Criteria Attractive Customer segments tend to have certain key characteristics • Customer Fragmentation: Significant opportunities exist to gain efficiencies through aggregating the customer in a central ordering system. • Order Size: Small orders are costly to process -- creating an opportunity to increase efficiency. • SKUs: A large number of SKUs are costly to process -- creating an opportunity to increase efficiency. • Level of Commoditization: Commodity products lend themselves better to e-business more the complex problems. • E-Savvy of the Customer: If the customer base is e-savvy, adoption tends to be more rapid. • Channel Fragmentation: Channels that are very fragmented tend to have greater inefficiencies and more opportunity to reduce costs. • Presence of Dot Coms: Dot coms often create channel competition and raise the potential for alliances • Growth Markets: Growing markets provide greater opportunity in the future. • Charter Founders: If all three charter founders are involved in the channel then potential throughput is greater and chance to achieve critical mass are improved.
Customer Selection- Sell-Side Ranking: Building Materials & Paperboard Fundamental Decision on Containerboard Include containerboard in marketplace Do not include containerboard
Selection Process - Buy- Side Fundamental Decision on Buy-side Create buy-side logs and chips as part of the Marketplace Use Timberdesk for the marketplace
Section Four 4 Points of Pain for Customer Segments
Points of Pain: Small & Quick Printing While each participant has its own unique areas of pain, many common themes exist across the the value chain. Commercial Printers • Managing the inventory • Inefficiency in the paperwork • Rework • Market Visibility • Order Status Small Printers & Quick Printers • Managing the inventory • Inefficiency in the paperwork • Market Visibility • Order Status Customers Merchants Mills • Break Bulk for small/medium orders • Order taking process • Credit risks/judgment • Purchasing process between merchant & Mill • Product availability • Managing Inventory • Market Viability • Bundling of paper grades • Outbound logistics (LTO) • Changes in order scheduling • Logistics, Logistics, logistics • Less than Truck Load • Planning • Tracking • Lack of consolidation • Lack of SWAPing
Points of Pain: Building Materials Much like paper, the building materials arena struggles with visibility across the entire chain • Inefficient Buy side transaction cost • Availability • Inventory Management • Order Status • Project Management Regional Distributors National DCs Mills • Purchasing Transaction costs • Selling Transaction Costs • Order status • Inventory Management • Program Management • People Deployment • Visibility of Demand- Mix issue • Inefficient transaction cost • Inventory management • Procurement of Fiber • Lack of brand equity
Points of Pain: Buy-Side Pulplogs and Chips Much like paper, the building materials arena struggles with visibility across the entire chain • Inefficient transaction cost • Availability • Inventory Management • Order Status • Quality Suppliers Mills • Visibility of Demand- Mix issue • Inefficient transaction cost • Inventory management
Section Five 5 The Solution
Section Five.One 5.1 Service Offerings of the Marketplace
$ $ $ $ $ $ $ $ $ Potential services cross multiple categoriesPriority services focus directly on the industry’s greatest areas of pain Illustrative Services Services Spectrum Potential NewCo Services SupportServices Community Content • ASP Services • Custom application interfaces • Professional & Consulting Services • Customer Services Desk • Collaborative Forum • FAQ’s and knowledge bases • Industry Events • E-mail • Catalog Content Management • Supplier information • Product specifications • Claim Management Logistics Web Customer Face Financial Services Commerce & Procurement • Fulfilment & Delivery • Order tracking • Logistics Procurement • Logistics Optimization • Online Invoicing • Payment services • Credit services • Escrow services • Online ordering • Order Configuration • Purchase history • Product catalogues • Auctions Suppliers Demand Planning Suppliers Suppliers • Workflow scheduling • Inventory management • Product Warranty administration • Replenishment management
Success requires rapid implementation of those services specifically resolve the greatest “pain” Implementation of Key Services - Pain Resolved and Ease of Implementation High Summary Customer support Product catalog • The services in the upper right-hand quadrant represent features that address a high amount of pain and are relatively easy to implement in the near term • We will roll out these critical services upon initial launch and will roll-out additional services on an on-going basis Workflow scheduling Online ordering Order tracking Search capability Collaborative forum Product reviews Vendor pre-qualification Site security Auctions Design tools Bill presentment Replenishment mgmt. Member confidentiality Payment services Self-directed order tracking Access to “expert consultants” Inventory visibility Pain Resolved Knowledge bases Inventory mgmt. Warranty administration Purchase history Directory assistance Authentication Buying guides Installation coordination Fulfillment & delivery Discussion threads Credit services Replenishment management Industry news and events Return/refund services Contract management E-Mail Escrow services Low Difficult Easy Ease of Implementation Source: Member interviews, PwC analysis
Service Offerings of the Marketplace Potential Services Providers (Wilson) In Progress 1. Logistics- Auction freight (including backhaul) 2. Information Services
Section Five.Two 5.2 Functionality Required
Functionality • Integration with internal systems is critical for value delivery • Transaction capability is the major source of revenue • Information is the key source of value • Standardization of tools and interfaces is an underlying principle • Requires standard approach to product description, attribute coding, images, substitutions, categorizations of products unit of measure
Section Five.Three 5.3 Technology
Web Server IIS, Apache, iPlanet App Server ATG, Websphere Personalization Engine ATG, Broadvision Commerce/Auction Engine Ariba, CommerceOne, Clarus Integration Engine Extricity, Vitria, WebMethods Database Engine Oracle, Sybase, Informix Software Family Candidates
Architecture Diagram Security Layer Certificate Server Insourced or Outsourced Ap Server T1, ISP Load Balance Web Server Ap Server Oracle NT Unix T1, ISP B2B Integration Layer Apache IIS Netscape IMI/Vivaldi Manugistics/ i2 ATG Net.Commerce Tradex/Ariba/ CommerceOne/ Clarus B2B Server w/ Modules for R/2, R/3, Legacy, etc. Vitria WebMethods Extricity/ Oberon
Build, Buy, or Partner • Build decision • Positives • System and architecture match goals • Control resides with owners • Ability to control target markets and • offered functionality • Negatives • Long term cost of ownership • High exit costs • Risk of wrong decisions • Progression of technologies • Buy Decision • Positives • Rapid delivery of functionality • Known functionality at outset • Existing name brand recognition • Negatives • Unrealistic valuations • Inability to customize functionality • in medium term • Lack of in depth knowledge of design • locks into existing partner relationships
Build, Buy, or Partner • Partner decision • Positives • Equity stake in existing entity • Quick path forward • Name brand recognition • Lowest risk - walk away option • Negatives • Not in control of technology or • functionality • May not gain own brand recognition Valuation Ranges Build $20M to $50M Buy $ 75M to $1B Partner $1M/% to ???
Section Five.Four 5.4 Revenue Models
Revenue Models • Transaction Model Options • Flat fee per transaction • % of transaction value • Subscription fee (no per transaction fee) • Hybrid • Customized by market • Drivers of opportunity • Decreased transaction cost • Value adding function • Outsourcing of internal processes Example: $10M per year operating costs Assume $10 per transaction 1,000,000 transactions per year $20 500,000 $50 200,000
Revenue Models • Transaction based revenue will ramp up based on: • Mass of buyers and sellers • Value add of the offering • Attractiveness of the pricing structure • Outside competition • Level of service (customer satisfaction) • Ability to shift orders from other channels • Additional sources of revenue: • Value adding service partners • Logistics management • Bill presentment and payment • Credit and factoring • Alliances with other related marketplaces
Revenue Models • Issues: • Balance between pricing and volume • Split of net savings between NewCo, buyers and sellers • This drives the issue of co-op vs. profit generation • How will owners capture their share of revenues • Profits from LLC • Lower transaction fees Key Decision Point Revenue/Saving split _____ % to NewCo _____ % to Producers
Financials Contents of the financial model: • General assumptions • Size of market segments, adoption rates, transaction types • Staffing information • Income statement • Balance sheet • Statement of changes in cash position • Taxes • Ratios • Free cash flows • Partners’ investments/returns • Valuations & benchmarking NOTE: Still gathering data to populate the model
Section Five.Five 5.5 Positioning
Section Two: Forest Industry EBH Marketspace Traditional forest and paper industry participants need to be aware that threats are emerging from not only e-business entrants, but also from a number of other fronts. Vertical Participants Horizontal Intruders Transformer & Enabler Threats • Enrononline • SCA Woodshop • Whitmar • Americanfinepaper • Paccessglobal • SAP • I2 • Oracle Bricks & Mortar • Paperexchange • PaperDeals • PaperSite • PaperTrader • FobPaper • Paperhub • Fibermarket • efibre • Packagingexchange • Talpx • Forestweb • Timberweb • Fiberexchange • Accesspaper • Corrugatedprices • fpix • Lumberweb • Greenbid • E-Wood • Forestindustry • Pulpandpaperonline • BuildNet • Cephren • Buzzsaw • Printnation • Recyclenet • imark • Packexpo • VerticalNet • FreeMarkets • BizBuyer • Asian Sources Online • Materialnet • Supplysearch • Commerce One • Ariba E-Business Pure Play
Section Two: Forest Industry EBH Marketspace Traditional players are being threatened from a number of angles increasing the vulnerability of existing participants. Papertrader Pure Play PaperDeals Fobpaper PaperSite Accesspaper Paperhub Printnation fpix Cephren efiber Fibermarket imark Fiberexchange Talpx Timberweb Pulpandpaperonline Recyclenet Greenbid Lumberweb Buildnet Forestweb Packagingexchange Buzzsaw Forestindustry E-wood PaperExchange E-Business Position Packexpo Whitmar Enrononline Americanfinepaper Corrugatedprices Bricks & Mortar SCA Woodshop Paccessglobal Market Orientation Domain Focus/Expertise Cross-Industry, Process Focus Note: All sites encircled are pureplays in a single domain focus.
Section Two: Forest Industry EBH Marketspace Most Hubs have gravitated towards multiple formats -- working to provide a service that often caters to both buyers and sellers Multiple formats Timberweb PaperExchange Accesspaper Printnation Fibermarket imark Cephren Buzzsaw Talpx Buildnet Forestweb Greenbid Fobpaper Format Diversification Enrononline Packexpo E-wood PaperDeals Corrugatedprices Papertrader PaperSite Fiberexchange fpix Packagingexchange Forestindustry Paccessglobal SCA Woodshop efiber Recyclenet Whitmar Americanfinepaper Single formats Pulpandpaperonline Lumberweb Dynamic supply-and-demand Buyer Focus Supplier Focus Market Advocacy
Trading Platform - Paper: Scenario One Scenario one creates a forest products “utility company” that will be “regulated” over the first couple of years - Providing a lower level of independence for NewCo End Consumer Customers Context Owner Content Large Commercial Printers NewCo (Independent Merchants, OEMs, Contract Stationers) GP Phase One NewCo Trading Platform Small Printers & Quick Printers Legacy Sites (Xpedix & IP, Unisource & GP, WY) IP Alliance Sites System-to-System (Big Box, Large Corp. Direct) WY Big Box Retail Phase Two • Strengths • Retain a greater level of say in your channel • Do not mitigate current e-commerce merchant initiatives • Weakness • Limit the financial potential of the marketplace • Create a critical mass/liquidity risk for NewCo. • Force NewCo to compete with itself for “eyeballs” • Customers are forces to interact with multiple sites • Create appearance of “merchant” platform that skims customers • Limits attractiveness for new entrants Assumptions • Merchants, OEMs, etc. are responsible for selling NewCo • Merchants continue to own the customer relationship • Each of the companies will have legacy sites that will use the platform to process transactions • NewCo will provide branded sites to other channel partners such as OEMs & Independent merchants
Trading Platform - Paper: Scenario Two Scenario Two creates a more independent entity that has both greater profit potential and increase exposure for the merchants & producers End Consumer Customers Context Owner Content Large Commercial Printers NewCo GP • Distribution Catalog • Xpdex • Unisouce • Independent Merchants • Contract Stationers • OEMs (Xerox) • Master Catalog • Auctions & Exchanges • Content • Value Added services Small Printers & Quick Printers Phase One NewCo Trading Platform IP Alliance Sites (ImageX) System-to-System (Big Box, Large Corp. etc.) WY Big Box Retail Phase Two • Strengths • Greater liquidity and critical mass at the site • Drives cost out of the supply chain (particularly merchants) • Creates appearance of merchant bias • Provides greater flexibility • Weakness • Merchants cannibalize their business • Merchant owned producers loose control of the customer • The entity takes on a life of its own Assumptions • NewCo sells the service to the customer • Auctions & Exchanges are a central component • All distribution channels are on equal footing
Trading Platform - Paper: Scenario Three Scenario Three provides greater independence for NewCo than Scenario but still allows the producer owned merchant to maintain the relationship with the customer End Consumer Customers Context Owner Content Large Commercial Printers NewCo (Independent Merchants, OEMs, Contract Stationers) GP Small Printers & Quick Printers Comp. Branded Sites (Xpedix & IP, Unisource & GP, WY) Phase One NewCo Trading Platform IP Alliance Sites System-to-System (Big Box, Large Corp. Direct) WY Big Box Retail Phase Two • Strengths • Still maintain some merchant ownership of the customer • Begin to drive more mass to the site • Have more seamless integration • Better aligns interests of existing sales forces with NewCo • Weakness • Customers still have multiple interfaces • Critical mass/liquidity is still at risk • Merchant-Customer relationship is potentially weaker. Assumptions • NewCo & Merchants sell the marketplace services • NewCo will provide branded sites to other channel partners such as OEMs & Independent merchants • Branded sites will have a separate customer“gateway” • NewCo and Merchants will share customer relationships
Governance Key Decision Points Sales force philosophy Merchant owned sales force NewCo sales force Positioning Scenario One Scenario Two Scenario Three