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Pay more attention to your customers, they could pay you more back
by Jim Kenny
Are the customers coming last?
There has certainly been no shortage of big news stories to keep the journalists at PPI busy in recent weeks. In practically every major paper producing region, the talk has been of mega-mergers, speculation on acquisition targets and a flurry of potential deals either being rubber stamped, or falling through. Clearly, not too many of the industry's senior executives spent much of the traditional mid-year vacation period lying around on the beach.
The reporters on PPI This Week, PPI Asia News and pponline have been pulling out all the stops to keep up with the maneuverings taking place around the industry. For example, just a few years ago, it would have seemed fanciful to believe that an industry giant of the stature of Fletcher Challenge would attempt to make an exit from the industry. Now, it is planning to spin off its paper interests to Fletcher Challenge Canada.
Recently, buzzards started circling over Champion International as rumors ran rife that UPM-Kymmene might make a bid. Champion and UPM-Kymmene were certainly not the only companies mentioned in dispatches from the merger and acquisition front though. SCA also made a highly publicized grab for Metsä Tissue, while snapping up AM Paper in the UK to whet its appetite for bigger things to come. Even the suppliers have joined in as Kvaerner and Ahlstrom announced they were going back to reappraise a merger strategy that would be acceptable to the European Commission competition authorities in Brussels.
Added to all that, practically everyone seemed to want to announce major restructuring plans. Smurfit made bold plans for the future, but perhaps most notably, Stora Enso saw its share price soar on the news of a new business focus and $2.1 billion in non-core asset disposals.
Among all the stories covered in recent weeks, arguably one of the most surprising was that UPM-Kymmene's fine paper alliance with APRIL (Asia Pacific Resources International Holdings) had been called off. After literally years of management effort spent trying to keep the deal on track, plus sizeable amounts of hard cash, the socio-economic and political risks involved in pursuing a high profile deal with the Indonesia pulp and paper giant finally proved too much for UPM-Kymmene.
Quite how the new-look UPM-Kymmene/APRIL relationship will eventually play out remains to be seen. Both companies clearly still have to work closely together to protect their combined interests in the Suzhou mill, for example. But the decision serves to underline the difficulties involved in crossing business boundaries, whether they be geographical or cultural, in today's 'global arena'.
Switching emphasis
All of which makes the comments by Mercer Management Consulting (MMC) staff - Piers Whitehead, Nate Lentz, and Jamie Bonomo - on page 32 of this month's issue all the more interesting. While the entire pulp and paper sector around the world is spending much of its senior management time examining the feasibility of mergers and acquisitions, MMC argues that they may be focusing their energies on the wrong area.
The consultants propose that if companies really want to see lucrative and sustainable long term gains in terms of margins and shareholder value, corporate executives might do better to spend more time getting to know their customers, rather than the financial advisers they will work with on the next "big deal". As MMC puts it, "Four strategies are currently in play in most asset-intensive industries - ongoing operating cost reduction, asset scale, industry consolidation and portfolio reshaping. Unfortunately, past experience shows that none of these strategies is likely to create sustained value growth."
"Surely some mistake?" comes the shocked reply from the pulp and paper executives. "After all, wasn't it these same superannuated management consultants and financial advisers that recommended and helped drive the current dash toward consolidation and restructuring in the first place?"
As always with management theories, there is a perfectly logical argument underpinning MMC's proposal that companies should aim to serve their customers better, or at least, the customers that value better service. Indeed, the whole theme of MMC's concept is pretty difficult to argue against on the face of it.
Yes, technology gains are relatively easily transferable by competitors (especially when the suppliers are fast consolidating as well). And no, consolidation probably doesn't guarantee long term commercial success. But there is another dimension to be considered here - specifically, the temporal dimension.
The point is, most companies in the pulp and paper sector are still a very long way short of exhausting the technological opportunities on offer. There is much work to be done in terms of both the product itself and the process and information technology that can be exploited to make paper a) a more valuable commodity and b) a cheaper product that is delivered efficiently in the format and timescale the customer needs.
Equally, while consolidation might not be the silver bullet answer, it does go some way to helping the industry to address issues such as core functionality within companies (ie focusing on what they're best at) and overcapacity.
Focusing on viable, lucrative customer relationships is of course a vital part of the job. But implementing effective new technology solutions and offering a global, comprehensive service are still some way off for most companies. In other words, technology and consolidation are set to play a major part in the development of the industry in the foreseeable future.
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