Alternative Strategies Key to Growth in
Mature North American Paper Markets
To remain viable, companies must establish new sources of growth as traditional markets
mature and business fundamentals grow progressively weaker. — BY FRANK PERKOWSKI
It is commonly recognized that businesses are either
growing or declining and that growing businesses are
more profitable, attract capital investment, fuel innova-
and consumer behavior, their negative impact on paper consumption will more than likely only increase in the future.
Going hand in hand with fundamental demand shifts is
tion, and provide more positive work environments for
the declining competitiveness of North American produc-
employees. Consequently, it is critical for North
ers in the global arena (see Table 2). It is well documented
American paper producers to find ways to grow their
that North American companies have fallen behind other
business even as demand for many fiber-based substrates
regions of the world in terms of investment, technology,
wanes or is more cost effectively met by offshore produc-
and overall cost structure. This has made North American
ers or alternative products.
companies vulnerable to further erosion of their competi-
Declining growth rates across most industry grade seg-
tive position in domestic and international markets.
ments during the past three years indicate that demand
for traditional paper products is maturing. While some of
the recent volume declines can be explained by external
NORTH AMERICAN COMPETIVENESS
Declining investment
factors, such as the broader economic decline and the
Aging assets
strengthening dollar, a more complete assessment of
Increasing energy and environmental
demand drivers also identifies other dynamics that should
Government subsidized foreign
send up yellow flags to paper producers.
Most of these developments (see Table 1) are relatively
Table 2. Key Factors Behind Reduced Competitiveness of the N.A. Paper Industry
recent phenomena and some of them are still in the early
stages of development. But based on observations of market
PA P E R D E M A N D R E D U C E R S
appear that unless unforeseen changes take place, there is
likely to be little if any improvement in the basic funda-
Increased access to the internet and its resulting use as a
primary communication / advertising medium
mentals of the North American paper business in the years
Outsourcing of general manufacturing to developing
countries
financial performance resulting in a continued high level of
Growth in electronic commerce and related commercial
applications
Increased availability of low cost advertising mediums relative to print such as cable TV and wireless communications
Flexible packaging innovations that offer consumers
increased convenience and package functionality
Increased organizational productivity through the elimination
of processes and reduced paper usage
Relatively higher cost of print due to rising postage costs
and lower cost alternative mediums
Table 1. Recent Developments Negatively Impacting Paper Consumption
30
In light of these demand and supply dynamics, it would
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PaperAge
ahead. This will lead to further declines in demand and
company consolidations and mill shutdowns.
New Approaches Required
To avoid continued deterioration in business profitability, North American companies must identify new
sources of growth to ensure that their businesses remain
viable. But how exactly does a company do this when
markets are becoming increasingly mature and business
fundamentals are weak and likely to get worse?
Following are three specific actions that companies need
to take immediately to begin this process of transformation.
growth
Re-examine Core Competence. Companies in our
based on distinctive value propositions. Companies that
industry must revisit some of their basic assumptions
adopt and become more oriented toward innovation or
relating to the core competencies within their organiza-
customer centricity will likely create a more differentiated
tions. As markets change, competencies must also evolve
position in our industry and better meet customer needs.
to meet the new requirements. Rather than defining
Traditional Growth Options
core competencies in terms of what has already been
The following approaches can be classified as tradition-
demonstrated, the focus should be on leveraging and
enhancing these demonstrated competencies so that new
al sources of growth that have been broadly employed in
areas of expertise can be developed.
the paper as well as other established industries. As mar-
Redefine the Business. This involves taking a fresh
look at what exactly the company does, what
customers/groups are served, who the competitors are,
and how the company differs from or is better than its
competitors. There is still a tendency in our industry to
define the business in terms of specific substrate types
kets mature, however, these approaches tend to become
less effective since they often fail to provide unique value
propositions or better customer solutions. For comparison,
all of the major growth strategies, including traditional and
innovative strategies, are charted in Figure 1 below.
High
Related Segment
Grow Target
Market
Re-Segmentation
Intangible Asset
Development
Strategic Alliance
Mergers/Acquisitions
Risk/Reward Continuum
that comes off of the end of the paper machine.
reflect the customer’s perspective.
A better approach is for companies to define their
business in terms of what customer problems are being
solved. For example, the envelope paper business may be
Growth Impact
However, this view is extremely limiting and does not
New Distribution
Geographic
Expansion
more appropriately defined as direct mail materials and
C1S papers can be more appropriately defined as “prod-
Low
Share Growth
uct identification” materials. The key point is that satisfying specific customer needs must be the focal point of
the business as opposed to the production of a specific
raw material or product.
Revisit the Core Business Strategy. Similar to core
competence is the concept of core strategy. In his book
The Discipline of Market Leaders, Michael Treacy identifies three possible/distinct orientations that define a company’s approach. These alternative orientations (operational excellence, customer centricity, and innovation) all
create value in different ways and determine how organizations compete. While a basic competence level in all
three areas is necessary to be competitive, successful
companies clearly favor one of these strategic approaches.
Most CEO’s in our industry probably believe their
companies are focused on operational excellence. While
Conventional
Strategy Effectiveness
Innovative
Figure 1. Winning Growth Strategies in Mature Markets.
Superior Execution. This option is the most common
growth strategy employed in our industry (operational
excellence) but the least effective in generating long-term
growth when markets are mature. Success in this area
will most often allow a company to merely maintain its
business and share position rather than gain a strategic
advantage. To the extent that a company can actually
execute significantly better than other major competitors
(which is extremely difficult when markets are mature
and most companies are focused on operational excellence), share and volume growth may be achieved to
some degree.
Geographic Expansion. This option produces growth
not necessarily bad, this reflects an underlying inside-out
because it establishes a company’s brand in new geogra-
focus, a commodity orientation, and product centric phi-
phies where it does not exist today or possibly in regions
losophy. A healthy industry offers a balance across the
where markets are less developed. Because most compa-
three orientations so that customers have more of a choice
nies in our industry place more strategic value on tangi-
and can develop stronger loyalties with their suppliers
ble versus intangible assets, this option is often only conJULY/AUGUST 2004
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31
growth
“By having less attractive traditional growth options available, North American
paper companies may be more motivated.....to consider bolder alternatives that
will ultimately create more viable, profitable businesses in the future.”
sidered in the context of asset purchases in new
geographic areas.
Several growth options are less commonly practiced,
Consequently, significant capital investment is nor-
particularly in established industries such as pulp and
mally required at a time when companies and the market
paper where companies have been less focused on devel-
as a whole are not returning their cost of capital. Also, if
oping the required competencies and internal capabili-
a company does not offer a significantly better customer
ties. However, these strategies can be more effective
solution, this option will not produce superior returns
growth options in established markets because they can
over the long-term and will therefore fail. In other indus-
potentially provide better, more differentiated customer
tries where intangible assets are more highly developed
solutions (see chart).
and superior customer solutions are offered, geographic
expansion is more likely to create value and offer a superior return on investment.
New Distribution Channels. As supply chains evolve in
Strategic Alliances. These are often difficult to execute because they require highly effective management
systems and good strategic alignment between two or
more companies. However, successful strategic alliances
emerging markets, opportunities in new channels often
allow companies to effectively access new markets and
emerge that provide better solutions to serve specific cus-
introduce new products with minimal investment in hard
tomer groups. The internet, club stores, catalogs, and office
assets. The key to success is finding the right partner with
supply outlets are examples of alternative channels that
complementary goals and capabilities.
have developed in recent years to service higher growth
niche segments within the paper and other industries.
While channels will continue to evolve in paper mar-
Software companies and service providers have been
most successful using this growth strategy because the
complete commitment of each partner is critical to each
kets and provide short-term growth opportunities for
other’s success. As the need for more integrated solutions
individual companies that are more responsive, distribu-
among paper customers increases (e.g., commercial print-
tion channels in mature markets such as paper tend to be
ers increasingly need total print solutions that incorporate
well served and growth in one will tend to be offset by
complementary paper, ink, print engine, and accessory
declines in others.
equipment), the opportunities for effective strategic
Mergers and Acquisitions. Still one of the fastest and
potentially significant roads to growth, M&A can also effectively destroy value (as many companies in our industry
alliances within our industry will increase and become
more critical for success.
Technology/Intangible Asset Development. The paper
have demonstrated) if synergies are not realized or the
industry has one of the lowest levels of intangible asset
value realized falls short of the acquisition cost.
value among all major industries. A tremendous potential
The lack of significant intangible assets or proprietary
value in acquired companies makes it difficult to generate profitable growth in our industry using this strategy.
32
Innovative Growth Options
source of new growth and value creation therefore
involves the development and leveraging of these assets.
By identifying and leveraging the value inherent in
However, to the extent that acquisitions can be imple-
proprietary brands, methods, technologies, processes, and
mented with the goal of creating a new customer solu-
organizational skills, companies can realize new growth
tion as opposed to a bigger version of what existed
opportunities without significant new capital investment.
before; profitable new growth opportunities can be real-
In addition, developing these hidden assets usually results
ized in mature markets.
in the creation of significant new value in the form of
JULY/AUGUST 2004
PaperAge
growth
more highly valued products and services and a stronger,
into complementary products or related products sold
more loyal customer base
into the same market or to the same customer segment.
Expanding Target Markets. This approach has been
most effectively employed by companies such as GE,
Allied Signal, and Coca-Cola, whose leaders challenged
their organizations to look beyond historical market
boundaries. Examples (albeit poor ones) of this approach
applied to our industry might define printing papers as
“portable communication devices” or folding cartons as
“product protection and merchandising aides.”
If these were the product definitions, how many different ways could they be executed in addition to the
current approaches employed by our industry? An
expansion of target market definitions would necessarily
lead to the need to develop new capabilities, customers,
and channels which in turn would lead to further growth
opportunities.
Boise Cascade’s recent purchase of Office Max is one of
the few examples of this growth strategy in our industry.
Other possible executions of this concept could involve the
purchase of businesses that provide equipment, materials,
chemicals, information systems, measurement devices, logistics services, and other business services to the existing customer base. Obviously, the possible opportunities for
growth in this area are almost limitless for companies with
the appropriate vision and commitment.
Summary
As the preceding list of alternatives suggest, there are
many opportunities for North American paper producers
to grow, even in cases where the company competes in
declining market segments with unattractive dynamics
and poor growth prospects. Importantly, the fact that
Re-segmenting markets. This approach simply identi-
domestic companies may not be cost or technologically
fies new niche segments or positioning alternatives by
competitive in traditionally defined paper markets does
slicing up existing/traditional markets in new and differ-
not necessarily preclude growth using some of these
ent ways. There are numerous alternative segmentation
alternative strategies.
approaches beyond the traditional methods that are
In fact, the lack of traditional growth opportunities
most often based on geography, channel, industry group,
may provide just the incentive needed to take advantage
or end use application.
of alternative growth possibilities. By having less attrac-
How many different product/service variations could
tive traditional growth options available, North American
be created by segmenting markets based on customer
paper companies may be more motivated (and therefore
income, usage levels, demographics, organization size, com-
more likely to be successful long-term) to consider bolder
petitive set, business segment, related purchase behavior,
alternatives that will ultimately create more viable, prof-
etc.? By better understanding your current customer base,
itable businesses in the future. ■
new segments can be identified that could potentially create a stronger point of difference for your business in tar-
About the Author:
get segments. This, in turn, can pave the way for additional
Frank Perkowski is the founder and president of
Business Development Advisory (BDA), industry-focused consulting firms based in Atlanta,
Ga. BDA concentrates on helping companies in
mature markets identify and implement growth
strategies that add value to their business.
Perkowski can be reached at 770-643-9081 or
by email at frank@bd-advisory.com.
growth opportunities through more effective geographic
expansion and intangible asset development.
Expansion into Related/Adjacent Segments. This is
the boldest, most innovative growth strategy of all, as it
builds upon an existing business to establish a potentially
much different kind of business. By utilizing existing
expertise or capabilities in a different but related context,
the company is able to establish a clearly differentiated
business in potentially new (but related) categories.
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There are many different applications of this approach,
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including horizontal and vertical integration or expansion
34
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