b'Changing IndustryTo best understand how these factors have impacted the industry, Continued From Page 1let\'s review each of them in more detail. Threat of New Entrants \' t the same time external forces were affecting the industry, there ~ ere a number of internal changes occurring as well. The competitiveEven though many contractors in the industry have experienced dynamics of the industry are possibly the most significant internalpoor economic performance, there continue to be new entrants factors affecting the industry.into the roofing contracting industry. The reason for this continual influx is that the barriers of entry have been virtually eliminated. lothepast,asignificantamountof capitalwasneededfor Construction GDP And Contractorcontractors to enter the roofing industry. AverageReal Sales 1979 - 1988 180rrOver the past 10 to 15 years, tbis barrier has been disappearing becauseof twobasic reasons.First,productmix withinthe J;industry has changed frombuilt-up(BUR)to single-ply,with 0 0 NonBUR requiring much more equipment than single-ply. In single;Cons\'.n.:c11j160GOPply,thecontractorismoreof an installerthanacontractor. Secondly,distributorshavebecomemoreinvolvedwiththe a. 0 CJcontractor byprovidingtechnicalexpertise,leasingequipment andservingasacredit source.Thiseasestheentryinto the industry,thereby increasing supplier negotiation power. 140I-+-+-~-+-~-+-,-\'.0 31979156219e519EIJ Supplier Negotiating Power Exhibit A U.S. Regional Employment Growth RateManufacturers\'leveragehasincreasedthroughconsolidation. 1979 - 1988Approximately 90% of the built-up roofing material market and the single-ply market is controlled by four manufacturers. With 2.5tbis consolidation, manufacturers have been able to influence the 2.0industry and the market with their increased leverage, and their ability to priceleverage,brandselland develop pull-through marketing, along with the shifting of value-added. Threat of Substitute Products 0.5 The shifting of value-added leads us to the third major item in the ModLIC\'-$1.IS"\'.a.nsSoull\'IC~ISov\'.\'lwnlA:idlyF~w~ AtJi,\'l.\'.oCC.-ta!UM!!.~ llNI.Scompetitive dynamics model - the threat of substitute products. This is probably one area that will remain constant as long as no Exhibit Bdominantnewproductsenterthe industry.Forexample,the introduction of single-ply significantly impacted the industry in Exhibit C illustrates these competitive dynamics which are brokenthe late\'70s and early\'80s and shifted the value-added to the down intofiveareas,allof which canhave an impacton anmanufacturer.Very simply,theshiftingof value-addedtakes profitability away fromthe contractor. Competitive DynamicsTo illustrate this shift oflet\'s assume that the overall value-added, price ofbuilt-up roof is $1,000, and the overall price of asimilar Threal of New Entrantssingle-ply roof is $900, approximately 10% less than a built-up roof (based on information obtained during the survey). This is a reasonablecomparison.If thebuilt-up roof is constructed,the lnlemalBuy~rcontractorwouldincurapproximately$500 of materialcost, CompclilionNegotialing Powerwhilethecostof materialforthesingle-plyroof wouldbe approximately $504. At first glance, this looks like a very insignificant Threat ofdifference, but let\'s take a closer look. Substilute Produc1s Based on information obtained during the survey, the contractor would seek to earn a profit ofon the BUR bid and $81 on the $90 \\,_.,.Exhibit Csingle-ply bid. So, as more and more volume is on the single-ply area,more profit fromtheoverall price of aroof shifts to the industry. Theroofingindustryisuniqueinthatmany of these factors have occurred over a relatively short period of time creating an environment that is in a constant state of flux.Continued on Page 4 Page3'