Australian Paper Manufacturers

• They could reap the benefits of economies of scope by using the same production process for fine papers.
• It put its investments(machineries) into productive revenue earning purposes
• First mover advantage in the use of highly technologically advanced fine paper machine.
• It was profitable to use pulp than sell pulp and hence moving into Fine papers business

APM in order to implement its decision went for a A$163 million modernization of Kraft pulp plant in Maryvale.  This upgradation added 140,000 ton of Kraft pulp capacity raising total output to 350,000 tons.  But along came the challenge – To establish APM in a PCA dominated market.

Race to Expand

Faced with the challenge of gaining market share in the new Fine paper business, dominated by PCA, APM decided to emphasize on Service and Quality of Products.  In order to provide better customer service, APM reached customers directly bypassing the merchants, which it thought to be of adding no value to the process. The fine paper market was expected to grow at 6.5% annually through ‘90s and capacity commitment was deemed necessary to gain first mover advantage and knock down competitors.

3. Problem Statement

Australian Paper Manufacturers have broken the long standing cordial relations in the Australian paper market by entering the fine paper market business in 1987. Through a robust operations and marketing strategy that was aligned with the Organizational strategy, APM was able to reap benefits in the fine paper business. With the fine paper market poised to go at 6.5% through the year 2000, there was enough scope in the industry for different market players. But the growing environmental concerns mean, it is very difficult for any company to expand without addressing the regulatory concerns. Hence the company that is most proactive in addressing the environmental concerns will be able to leverage on the growth opportunity provided by the market. Thus the problem faced by Ken McRae, the general manager of APM is

“To decide on a strategy that would chalk out the future of APM with a clear perspective of environment needs,  competition, and required rate of return”

4. Analysis

Attacking and Defending through Operations

When APM decided to enter the fine papers market, its strategy has been to attack through better operations capability. This is a classic case of a weaker competitor attacking a larger company. Since it is an internal capability of the organization the advantage has been least visible to the larger player and has also ensured that the larger player is not very much concerned about the new competition. Further APM’s position of replacing imports thus becoming the second player in the market dominated by PCA could have also possibly resulted in the complacency of PCA. PCA’s competitive spirit might also have been tamed by many years of market dominance. The plants of PCA have had very minimal technological changes in recent years. The development of Kraft pulping plant also helped APM to enhance its yield, thus providing yet another source of competitive advantage

Differentiating competitive position

APM identified a latent need in the market for good quality and service. Hence APM decided to focus on dependability and quality of its products. Thus APM decided against matching the variety provided by PCA and limited itself to producing standardized products. Further APM also matched the prices of PCA. PCA owned 2 of the top 3 paper merchants in the market, which further worked as an entry barrier for new players. APM overcame this through its direct to customer efforts. APM also reduced its pack sizes such that it is more convenient to the customer.

Goal Congruence

Throughout the implementation of APM’s entry into fine paper market, the senior management has worked towards ensuring that the entire organization works towards achieving this strategic goal. The manufacturing department and the plant operators were involved in the trial runs right from the design stage of Machine 3 in Maryvale plant. This ensured that the operators were aware of all the nuances of operating the machine even before the pre-production runs began. The marketing program also ensured that the product was taken to the right target segment.

Competitive Strategy of APM

Based on the position taken by APM in its entry to the fine paper market, it can be concluded that APM had chosen to target a niche customer segment by differentiating itself based on quality and service. Hence the current competitive strategy of APM would be “Focused Differentiation”.

Based on its current strategy, the natural path for APM would be to address a broader market, thus improving its market share. Hence the natural progression for APM would be to get into “Differentiation” strategy where it would be focusing on a broader market with emphasis on quality and service. To achieve this APM might also have to depend on paper merchants and could not rely on direct customers alone for its growth.

The Industrial Landscape

The industry which was characterized by low competition and very cordial relations between different players has changed dramatically with the entry of APM into fine paper market and growing environmental concerns.

Industry Competitors

The rivalry among existing firms ,APM and PCA along with imports, have grown with the entry of APM into the fine-paper market. But the fact that the market is projected to grow at an annual rate of 6.5% through the year 2000 shows that there is enough market for all the competitors to gain by investing in correct strategies.

Bargaining power of Suppliers

The major suppliers for the paper market will be pulp manufacturers. But both the players, APM and PCA have their own plantations and pulp manufacturing plants from where they source the pulp for their needs. Hence the bargaining power of suppliers as such is very low or non-existent in current scenario.

Bargaining power of buyers

The paper merchants constitute the major portion of the direct procurement from the paper manufacturing plants. With PCA owning 2 of the 3 major paper merchants and the existence of very few players in the market along with the growing market means that the bargaining power of buyers is very low. Though the buyers have started recognizing environmental needs and request environment friendly paper products, their bargaining power overall is pretty low.

Substitutes

There is no clear substitute available to the paper industry. But the close substitute from within the industry could be the chlorine-free environment friendly paper.

Other Stakeholders

In addition to the five-forces model popularized by Michael Porter, it is also imperative to consider the impact of other stakeholders, viz. Environmental groups and Government regulations. From the failed efforts of PCA to expand its capacity, it is very clear that environmental groups play a major role in deciding the future course of the industry. Thus it is very clear that only those companies that are proactive in adhering to environment friendly technologies will be able to sustain in the market in the long run.

Potential Entrants

By looking at low bargaining power of buyers and suppliers, a healthy growth rate, the market looks like an attractive industry for new entrants. But the environmental regulations, high capital requirement with the high risk involved in the industry mean that the threat of new entrants is relatively low for the industry

Three differing perspectives of the stakeholders

APM and other companies:

The case examines mainly the perspective of the companies on the issued raised, so these need not be repeated here.

Regulators or Government:

The command-and-control approach i.e. introducing laws to curb activities that were considered detrimental to the environment was never as successful as its advocates among the environment groups claimed. The gains achieved come at a high price. That is because technology mandates and bureaucratic edicts stifle innovation and ignore local realities, such as varying costs of abatement. They also fail to use cost-benefit analysis to judge trade-offs.

Command-and-control methods will also be ill-suited to the problems of the future, which are getting trickier. One reason is that the obvious issues have been identified or tackled already. Another is increasing technological complexity: future problems are more likely to involve subtle linkages—like those involved in ozone depletion and global warming—that will require sophisticated responses. The most important factor may be society's ever-rising expectations: as countries grow wealthier, their people start clamoring for an ever-cleaner environment.

In recent years, market-based greenery has taken off in several ways. With emissions trading, officials decide on a pollution target and then allocate tradable credits to companies based on that target. Those that find it expensive to cut emissions can buy credits from those that find it cheaper, so the target is achieved at the minimum cost and disruption.

Europe, meanwhile, is forging ahead with another sort of market-based instrument: pollution taxes. The idea is to levy charges on goods and services so that their price reflects their “externalities”—jargon for how much harm they do to the environment and human health. Also environmentally harmful subsidies have to be discontinued. These range from prices below market levels for electricity and water to cash handouts for pollution intensive industries such as coal.

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Environment Groups:

The environment groups take the view “How can you put a dollar value on the sensible use of the environment?” which typifies the rising sentiment of citizens in developed countries.

They investigate practices of the companies involved in industries that might lead to highly toxic effluents, conduct independent tests to analyze levels of pollution and whether the required level of waste treatment is being carried out by the companies before release of the effluents.

They also draw attention to potential loopholes in pollution related laws, and ensure that companies which are taking advantage of existing weak laws do not continue to do so by lobbying for changes in laws.

Environment groups also press for cut in subsidies to industries that manage to keep costs down due to them, thereby feeding demand. Some groups like Environment Defense are also successful in getting bills for pollution taxes passed by their respective governments.

Environment Consciousness

There is a stark contrast in the approach of PCA and APM towards environmental issues. While PCA has been reactive in dealing with environmental regulations and has been struggling to keep up with the changing regulations, APM has managed to be ahead of regulations by proactively innovating keeping in mind the dynamic environmental needs.

There are many direct evidences from the case, especially in the Bridport proposal and Kayser plant expansion, on how PCA had tried to challenge regulations and thus postpone any changes in its operations to move in line with the dynamic regulations. At the same time, APM has always been able to maintain its track record of being recognized as a sensible environment player.

Based on the above arguments, it can be concluded that PCA is in Stage 1 in environmental management and APM is in Stage 3 or Stage 4 in environment management.

Influence of Environment on Operations Strategy

The Operations strategy of APM (or any player in the market) is influenced the most by the socio/political environment of the industry and the customer perceptions of the environment friendliness of the various market players.

A company operating in this industry could choose to have an adaptive Operations Strategy where it would try to align itself with the latest environmental regulations forced on the company due to governmental and competitive pressures. PCA falls under this category of companies.

On the other hand, a company might also choose to adapt a proactive strategy wherein it would try to be ahead of the environmental regulations by constantly innovating to reduce harmful wastes it emits. APM falls under this category of companies

How Environment affects Organization?

Peter .T. Ward et al. in their research publication, Configurations of Manufacturing Strategy, Business Strategy, and Environment, published in the Journal of Management, 1996, Volume 22, provide a configurational approach to linking Environment, Structure and Strategy.  The environment consists of both the task environment and the physical environment like the one in case. Traditional literature says that Environment influences competitive strategy (Bums & Stalker, 1961; Dess & Beard, 1984; Hambrick, 1983, 1985; Miller & Friesen, 1984), while this framework goes on to say how Competitive strategy and Environment have a mutual causality.

Exhibit 1: Strategy, Environment and Culture.

Source: Journal of Management 1996; 22; 597 Peter T. Ward, Deborah J. Bickford and G. Keong Leong

APM by moving ahead into and investing in a chlorine free bleaching process development can have far reaching impact in the environment.  Firstly, the new process will result in no organochlorines and thus gaining acceptability from environmentalists and green peace activists. Second, APM could use the new process to be a source of competitive advantage in the market. Customers have already expressed their willingness to pay more for an environmentally good product, which means it could recover the investment in the new process easily. It could be used as unique selling point for APM. This strategy would then force its competitor PCA also to adapt to the new process, as customers and environmentalists will endorse the chlorine free paper. The institutional theory of organization-environment relation talks about such pressures from the environment causing isomorphism in processes and structures of the firms competing in the industry. American sociologists Woody Powell and Paul DiMaggio classify such actions by competitors as Mimetic institutional pressures, wherein the uncertainty in environment forces competitors to copy structures, practices and outputs.

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5. Criteria for Evaluation (in order of decreasing priority)

• Proactive Environment Policy
• Market Share
• Return on Investment

Proactive Environment Policy is the significant criteria as it envisaged as the source of competitive advantage. As a new entrant, the next important criteria should be expand and capture market share. Shareholders have invested expecting a minimum return on investment. So, that is also included as a criterion to evaluate the options.

The options are subjected to the constraint of limited capital (A$ 50mn) available from the parent company.

6. Immediate Options available for APM

• Option 1: Expansion at Maryvale to increase the capacity of uncoated paper from 70000 tonne to 100000 tonne with estimated capital expenditure of A$ 35mn. Since the projected demand for copier paper is projected to increase 78.5% over 6 years (from ’89 to ’95) and as the demand for the other segments are more or less stagnant, we consider that the additional capacity will be utilized in manufacture of copier paper.
• Option 2: Expansion at Fairfield to increase the capacity of Recycled paper from 7000 tonne to 15000 tonne with capital expenditure of A$ 18mn. This will help consolidate the position in the recycle paper segment before entry of competitors and to reinforce the importance given to environment by the management.
• Option 3: Incorporating Oxygen pre-bleaching in the Maryvale plant to reduce the Chlorine usage by 50%. This requires a capital investment of A$ 15 mn. This also results in 5% reduction in the pulp output.
• Option 4: Intensify the use of Oxygen during bleaching to reduce the Chlorine usage by 15%. This requires capital investment of A$ 8 mn and the pulp output is not affected.

7. Evaluation of Options

Even though Option 1 is the best in terms of achieving better market share and rate of return, it is not in line with proactive environment policy adopted by APM. So, this option is not adopted.

Option 2 consolidates APM’s position in the recycle paper segment before the entry of others. This also reinforces the proactive environment policy of APM in the minds of the consumers. So, expand the Fairfield plant capacity though its NPV is lesser than that of Option 1.

Option 3 reduces Chlorine consumption by 50%. But, it reduces the pulp production by 5%. With a pulp contribution of A$ 200 per tonne, it translates into loss of A$ 3.2mn per year. As it provides negative return, it would be difficult to justify to the parent company and it might also erode the competitiveness. But, to show incremental process improvement, implement the Option 4 to show incremental process improvement.

8. Role of Ken McRae

Environment activism can force companies to follow two paths

• Be a reactor, respond to regulation and increase the investment to control the environmental impact caused by the manufacturing process
• Be pro-active, anticipate the future of regulation and invest in technology which eliminates the root cause of pollution

In the first path, one needs to increase the cost just to stay at the same place. This is because the regulatory requirements increase over time and the company is intent on tackling the ill-effects of pollution instead of attacking the source of pollution.

The second path attacks the root cause of pollution and changes the way the product is manufactured. This approach eliminates the cost of tackling pollution and can potentially reduce the cost of manufacturing the product.

APM has adopted environmental consciousness as a source of competitive advantage. So, the second path is in line with this and they have to adopt that approach.

There is a general feeling that environment consciousness and competitiveness are not simultaneously achievable. They are considered as a trade-off. But, Michael Porter advocates that it need not be the case. He argues that just like the Japanese proved that quality and low cost need not be mutually exclusive, environment consciousness and competitiveness can be achieved at the same time.

Examples of being environment conscious and improving competitiveness:

Dutch Flower Industry:

Dutch is the market leader in the cultivation of flowers. Use of pesticides, herbicides and fertilizers was causing land pollution and contaminating the ground water as well. Facing increasingly strict regulation, they understood that the best way to solve the problem is by eliminating the source of pollution. They started growing flowers in water and rock wool. This lowered the risk of infestation and reduced the requirement of the fertilizers and pesticides, which were delivered in the reused water.

Product quality improved as they could tightly control the conditions. Handling costs also reduced as the flowers were grown in specially designed platforms. Thus, in addition to eliminating the pollution, they also increased the quality, lowered costs and enhanced global competitiveness.

Clamtrol Dosing:

Traditionally, chlorine is dosed in the cooling water system of power plants to prevent organic growth in the pipeline. But, recently, a proprietary chemical, Clamtrol is being marketed by GE. Clamtrol is dosed in the cooling water system for 8 hours once in 15 days. The chemical forms a film on the pipe’s internal surface and also kills the organic growth. Moreover, it is bio-degradable and it is not harmful to the aquatic life. Adopting this system also eliminates the need to store the dangerous chlorine in the plants. Chlorine is corrosive and so clamtrol dosing also helps in reducing the corrosion of the pipeline. So, this mechanism leads to elimination of chlorine, reduces costs of chemicals used and increases the life of the pipeline.

Also, polls indicated that the end customers are environmentally conscious and reported purchasing products that did not damage the environment. A Good percentage of them are also willing to pay a premium for such products. So, feasibility of technologies adopted by West German company Hannovershe Paperfabrik and those suggested by Sweden Chemical Inspectorate should be explored. On top of the higher margins commanded by such products, it also forms a source of competitive advantage due to first mover advantage.

So, one of the main tasks of Ken McRae is to educate the parent company about the benefits of adopting a pro-active environmental policy though in the short run the returns can be lesser.

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9. Recommendations

• Invest in the capacity expansion of the recycle plant, Fairfield
• Intensify the use of oxygen during bleaching to reduce Chlorine consumption by 15%

Long-term:

• Invest in R&D to develop chlorine-free paper. Consider the technologies adopted by West German company Hannovershe Paperfabrik or those suggested by Sweden Chemical Inspectorate for future expansion.
• Along with the future expansion, invest in coater. This gives a toe-hold in the coated paper segment and will increase the flexibility to alternate between coated and uncoated paper.

Fit between Short term solution and Long term Strategy

APM by committing to expand the recycler plant facility at Fairfield and invest in the development of chloride free bleaching will ensure that it remains environmental friendly and steers ahead of the environmental pressures like the ones facing PCA. The recycler plant will help it meet the short term demands from the market. Although, the proposed recommendation yields slightly less than the required returns for APM, the onus is on Ken McRae to be the champion for the new project and investment in convincing Amcor Corporation. APM will use the chlorine free process as a stepping stone to its Long term capacity expansion plans, which includes a 150,000 tones paper machine and pulp capacity enhancement to move into the coated papers business. The chlorine free technology will be accepted by the environment and the paper will be endorsed by the customers. This involves a lot of management effort in marketing the new paper and making customers aware of the benefits of the environmental friendly paper. PCA succumbed to environmental pressures precisely to this reason, for its expansion plans were not in line with environmental requirements.

PCA’s possible response to APM’s strategy

PCA is currently facing severe environmental pressures in dealing with issues at the Kayser plant and the Dioxin emissions.  Having a set of old machines and technology, the incentive to move forward, with huge capital outlays in new technology and new processes is comparatively more for PCA than APM. Owing to inertia and being a market leader, PCA had ignored such environmental concerns in the past and has always questioned the environmentalist’s accusations. PCA today faces pressure not only from environment but also from competition which will prompt it to invest in new technology. Years of path dependence and the gestation period for the new technology will imply a time gap in catching up to APM in terms of technology and process. PCA will use its market leader position by doing any of the following or a combination of these.

• Going into a price reduction spree
• Manufacturing of recycled paper.
• Strengthening Distribution channel and customer retention through a formidable alliance.

All of the above will have a financial impact on the company. In addition to the investment required for expansion and upgradation of technology, the situation in hand might push PCA into financial trouble. PCA most likely will move into introducing Recycled paper in the market and increasing its share of production. Hence, entry into recycled paper market will form a small part of the various steps PCA will have to take to sustain in the industry.

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