Michael Shanahan is vice president and managing director Resource Industries, Arthur D. Little, Cambridge, Mass.

Where the mind is without fear and the head is held high, where the world had not been broken up into fragments by narrow domestic walls, where the clear stream of reason has not lost its way in the dreary desert sands of dead habit, into that heaven of freedom, let my company awake.

—Inspired by a poem by Rabindranath Tagore

The strength of any business comes from tapping into all the capabilities and competencies of its people…the competitive difference is in how well we use people and how well people are brought into the participative process. Are they really controlling the process? Are they really learning how to problem-solve on the shop floor at 3 a.m. and not just during the day when the technical people are there to help?

—Roy Barry, president and CEO, Madison Paper Industries

Despite the clear trend of growth in international trade the North American market is, and will continue to be, the single largest and most homogeneous market in the world. The question is, who will be its supplier? Perceived wisdom would pose this question in a context of global competitiveness, and would argue that it is structural factors which determine this. Global producers have to secure the best cost of fiber, energy, labor, and transportation, and produce the “appropriate” grade in a particular region of the world. Where else should newsprint be produced other than in Canada or coated groundwood in Finland and free-sheet in Brazil and Indonesia?

This is a myth; structural factors can be overcome. The global cost curves are not that steep. For 70% of capacity, costs vary less based on structural factors than they do within any one domestic industry or, indeed, company organization. For example, direct costs of coated free-sheet ($700/ton), which are 75% of the total, can fall within the same location between $640/ton on a good day and $800/ton on a bad day, depending on production efficiency, yield, etc. In addition, indirect costs typically range between 20% and 25% of the total cost for U.S. and European producers, or $175-$235/ton. This totals a variance of $220 ($815-$1,035) internal to a domestic industry or organization. Compare this to the global cost gap of approximately the same. In other words, at maximum efficiency, in terms of direct usage of input costs and utilization of fixed assets, as well as in the use of operating overhead, any U.S. or European producer can match any global player in terms of cost—on a good day!

So how to get this level of performance? In this capital-intensive industry, breakthrough and sustainability can only come from systematic intervention in the whole business system, which includes the human system. It is common for management to fall into a trap of successive short-term solutions. In response to poor results, a “can do” management would fix the problem by implementing short-term “cost reductions.” Or to more significantly improve the processes, management would work on technical systems by implementing some genuine process redesign—and, of course, spend large amounts of capital on bigger and faster machines. But the changes are usually not quick or large enough to make for competitive advantage. And the capital expenditure all too often results in a mismanaged supply/demand balance, bringing down prices faster than costs.

A sustainable solution is to first work on the human system at the three levels of senior management, middle management, and front-line supervisors and operators, in such a way as to communicate consistent beliefs and assumptions throughout the organization—and to drive for real performance change.

In the first instance, senior management needs to authorize and drive intervention in the system. Remember, all businesses are perfectly designed systems—to get the results they get! If you want a significant shift in performance, you have to change the system. This includes working not just on the technical, but the human, and organizational simultaneously. As one inspired maintenance consultant once said, “only the CEO can authorize the work that really matters.”

On the second level, middle management and front-line supervisors have to be moved out of their uncomfortable position of being uninvolved in team initiatives but impacted by them; not being consulted even though they have influence and power; of being compliant, (whatever the boss wants) to being committed.

Thirdly, operators need to be motivated: to be efficient, excited, to embrace learning and change as part of their job.

So any change must not be seen as a technical challenge alone, but rather as one involving a human challenge as well. If you focus on the natural leaders in your organization, this can happen.

In conclusion, “global cost capacity curves” can be smaller then cost gaps within one’s own organization or domestic industry. Capital and technical improvements alone, without attention paid to the human system, are not the solution. Finally, direct intervention—strategic and organizational—in the business system is required to achieve breakthroughs. *

This was excerpted from a paper given at the Paper/Forest Products Global Outlook Conference in November 1998