Substitutes
Paper industry has felt the impact of growing number of e-book readers, smartphones and tablet PC’s just to mention few. Digital substitution has hit the mature markets but might affect the emerging markets as well. People, for example in India, might take a leap in technology and move straight to digital news paper even though printed papers have increased together with the higher living standards. According to PwC, consumers are not the only ones causing decrease in the demand for paper. Also advertisers are investing more and more on digital forms pushing down the number of magazine and newspaper pages. Businesses are also looking for ways to shift away from paper billing, paper tickets and changing processes to digital ones. Sectors such as packaging and hygiene applications will continue to prosper, especially in the emerging markets. In this area, however, innovation will play significant part. (PWC, 2011)
Buyers
Many industries, such as food sector and retailing are concentrating more and more, becoming big and powerful against competition and suppliers. This creates bigger bargaining power for the buyers of the paper industry products. Furthermore consumers’ do not face big switching costs from for example newspapers to digital substitutes or one paper producer to another one, hence granting them bargaining power as well.
THREE MAIN COMPETITORS
SCA Svenska Cellulosa Aktiebolaget
SCA is a world hygiene and paper company. Total asset have been merely decreasing last years and are 139,004 millions of SEK. The company aims to be a leader in providing product improving day-life. The value of the firm is based on its history and technological process, SCA’s value is a sustainably production. As the company works directly with raw ecological product, environmental concerns are clearly in its mind. Trying to improve the way resources are efficiently used, is trying to improve the firm’s value. Even if it has a clear positioning, the company has seen its ROE dropped to 1%, even if the return on capital employed was 10 % with an objective of 13 %. We will focus on the division of forest products.
Forest products, such as paper and pulp, very substitutable product, account for 16 % of SCA’s net sales. This division of the group is well resourced. The company is the largest private forest owner in Europe with 2,6 millions of hectare. This resource is the one of the main advantage SCA has, integration of supply of raw material is closed to 50%. This is not the only advantage the company has, they also have important capabilities. Its business is geographically dispersed, sales are made in more than 100 countries, and the production counts 250 units manufactures in 40 countries. The company has a valuable know-how: the knowledge of local market conditions and its global experience.
Although SCA maintain a close relation to its consumers, the company first has to face the retailers. Their size is a key parameter, and they are integrating horizontally. The ability of SCA of making profit is linked to its relation with the retailers.
To face future, the company is implementing its strategic priorities which are capital efficiency and growth. Capital efficiency is realized through cost effectiveness and improving the cash flow. Last year, 2011, the operating cash flow generated was 8575 million SEK. Growth rests on the aim of the company of being the leader in its products and on the consistent work of research and development.
Big is not a synonym of success and in the future the forest product division of SCA will face big challenges such as changing markets and changes in consumer behavior. Its profitability will depend on its ability to move with the demand and continue developing its resources.
Stora Enso
Stora Enso emphasizes strongly that renewable materials are in the focus of their future operations. Since wood is and will be the most important raw material Stora Enso tries to ensure that keeping this material by improving economically, socially and environmentally sustainable and tree plantation management practices. The aim is to meet the needs of their customers and at the same time cope with the challenges of today’s global raw material challenges. Regarding these challenges Stora Enso is formulating their goals and values accordingly to the key areas of creativity, renewable products and trust.
Due to rising energy costs as well as the environmental implications Stora Enso tries to generate energy internally and could raise the electricity self-sufficiency from 33 % in 2009 to 40 % in 2011. Additionally, Stora Enso invested in Wind parks to contribute to the increase of usage of low-carbon sources.
In order to achieve goals like bringing environmental benefits such as improved resource efficiency the investments in R&D in the amount of 80.1 million EUR or 0.7 % of the revenue in 2011 were made. Furthermore, new products are being developed in cooperation with customers and other stakeholders in the key-areas of wood- and fibre-based products, services and bioenergy. (Stora Enso Global Responsibility Report 2011, p. 29). The search for new products and new opportunities led Stora Enso also to growth markets like South America (Uruguay, Brazil) and Asia (China, Laos, Thailand) where they are parts of joint ventures. The heavy investments in plantations in growth markets and R&D go together with a sharp increase of employees.
How Stora Enso wants to gain a competitive advantage in the future they formulate shortly but concisely: “We will win with solutions based on renewable materials.” (Stora Enso Financial Report 2011)
By putting a focus on a fibre-based packaging that offers long-term growth and innovation potential the company has created a new business area called “renewable packaging”. The other three areas “Printing and Reading” (Newsprint and Book Paper, magazine paper, fine paper), “Biomaterials” and “Building and Living” (wood based innovations for construction and interior decoration) are completing Stora Enso’s product range and show the diversification efforts.
The Return on Equity declined sharply from 13.5% in 2010 to 5.6% in 2011 due to a decline of operating profit from 986.2 million EUR (2010) to 759.3 million EUR (2011) whereas the cash flow after investments increased from 591.7 million EUR to 624.7. The total assets remained stable with 12 999. 1 million EUR compared to 13 036,7 in 2010.
Holmen Paper
Holmen and Stora Enso both produce different types of printing paper, packaging boards and sawn timber. Holmen paper is focusing on product innovation but from a low level and increased focus on green electricity from biomass and wind power (Ottosson, 2012). Holmen skog is managing and developing land holdings around 1,3 million hectares, which 1 million are used for forestry. Annual volume of wood harvested in company forest is 2,5million cubic meters. Annual hydropower production amount is around 1100 GWh. Holmen have valuable forest energy and forest assets. They are about 60 % self-sufficient in wood and 30 % in electricity which gives them a significant advantage.
Holmen’s strategic focus is to expand, to develop and to remain a strong supplier with efficient production. Majority of the growth is within organic by improving products or increasing production volumes. Holmen is aiming for renewable and climate friendly alternative. Holmen is also working with Social responsibility. Local residents are consulted in cases where Holmen’s industries are located close to communities. They are consistent working with global responsibility, economic, social and environmental matters. Holmen’s goal is to produce 1TWh of electricity from wind power/year (Holmen Annual Report 2011). Holmen recently announced major investments in wind power (Ottosson, 2012).
Development in R&D has been necessary because of unprofitable production facilities. In recent years for example the demand has decreased in newspaper printing. In order to get a competitive advantage they have focused on more advanced grades of paper to be developed. Iggesund have invested in R&D and adapted production to priorities top-quality paperboard. Sawn timber is continually developing with specialized subcontractors. The new Braviken sawmill is an advanced sawmill for construction timber. Good potential is expected in increasing growth rate in group’s forest by 25 % in 30 years, increased wood production (harvesting) to 20 % in 30 years.
Holmen paper had a return on equity on 23.1% from 2011. Which is remarkable if you compare to the result of 2010 when they had a 4,2% return on equity.
Holmen
Tangible: Managing land big landholdings, announced major investments in wind power. Today: 60% self-sufficient in wood and 30% in electricity. Investments in R&D.
Intangible: Focus on “green” electricity from biomass and wind power, high diversification, trusted and environmental focus.
Human Resources: 4241 2010, slightly shrinking number of employees because of efficiency goals since 2009.
Stora Enso
Tangible: Plantations in growth markets, part-owner of wind parks, investments in up-to-date mills
Intangible: high diversification, oldest company of the world, trust through focus on environmental aspects
Human Resources: 29 505, growing number on growth markets which leads to further knowledge
SCA
Tangible: 250 production units, Europe’s largest private forest owner, integration of supply of raw material of 50%
Intangible: Knowledge of local market condition, global experience, high brand reputation for hygiene articles
Human Resources: 43 697 employees
ANALYSIS AND FUTURE PROGNOSIS
The challenges in the paper and pulp industry are widely spread over the industry and they are concerning a great part of the world population.
One of the biggest concerns of the paper business are the problems of climate change and the fact that deforestation is affecting the environment. Because of this, the paper and pulp industries need to overcome problems like efficient and ecological ways of planting new trees. As the pace of deforestation is increasing, the access of forest is decreasing and hence provoking price increases. However, this obstacle can also give rise to opportunities in product development of ecological or “green” products.
As the technology is moving forward and more people use electronic equipment instead of printed paper (e-mails instead of letters and bills, online newspapers etc.) the demand of paper is declining. In emerging markets this demand might rise in the future. However, the future development of economies like Africa and India might even skip the phase of a “paper industry” and consumers start immediately using electronic equipment.
By putting the three Swedish companies in comparison we find that SCA is the most promising company to respond to the future challenges in the industry. Firstly, they are the largest owners of forest in Sweden, giving them an advantage in continuous flow of input factors in the production. SCA is geographically wide spread meaning that despite decrease in demand in the European market, SCA can profit from increase in demand in emerging countries. SCA’s diversified product supply corresponds well to products that are demanded in both the Occidental world and in Emerging markets. SCA has an advantage in market leadership in personal hygiene products, as well as in cost leadership. Our findings are being supported when we look at the Return of Capital employed figure: Compared to Holmen (7.6%) and Stora Enso (8.7%) SCA has 9.4% which indicates how efficient and profitable SCA is working with the total capital employed.
References
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Holmen, 2012. Annual Report [online] Available at:
<http://www.holmen.com/Global/Holmen> [Accessed 10.9.2012].
LRF Consult, 2011. Skog och markinvesteringar mer attraktivt vid börsoro. [online] Available at: <> [Accessed: 11.9.2012].
Ottosson, M. & Magnusson, T. (Forthcoming). Socio-technical regimes and heterogenous capabilities: The Swedish pulp and paper industiy's response to energy politics. Technology Analysis and Strategic Management.
PWC, 2011. Growing the Future. [pfd] Available at: <> [Accessed 11.9.2012].
Skogs Industrierna, 2010. The Swedish Forest Industries – Facts and Figures 2010. [pdf] Available at: <> [Accessed 10.9.2012].
Skogs Industrierna, n.a. The Forest Industry – A Natural Part of Sweden. [pfd] Available: <> [Accessed 10.9.2012].
Stora Enso, 2012. Global Responsibility Report. [online] Available at: <> [Accessed 10.9.2012].
Stora Enso, 2012. Financial Report. [online] Available at: <> [Accessed 10.9.2012].
The Swedish Forest industry, Facts and figures 2010, Report by SFIF, the Swedish Forest Industry Federation [pdf] Available: < > [Accessed 10.9.2012].
by
matfo621 (student)
