Paper companies crawl into the 21st century
Forest products companies are advised to get their skates on and make the necessary preparations to ride on the e-business bandwagon before it is too late. If they do not, the opportunity might well pass them by
by Douglas P Hayhurst
What do forest and paper companies know about e-business? Not enough, according to PricewaterhouseCoopers (PwC). This opinion is based on the results of a PwC survey of the Top 100 forest and paper companies' web sites. The survey looked at the functionality, strategy and visual impact of the sites.
For forest and paper companies to capitalize on the value proposition that e-business offers, the industry first needs to change some of its business strategies. Three related factors are affecting the performance of the forest and paper industry and driving the industry to change. Firstly, the sector is destroying its capital. With a return on capital employed (ROCE) level of 5.4%, the industry is not only destroying capital, but in an increasingly competitive marketplace, players must now fight to get their hands on financing. To reach and go beyond their 12% ROCE target, forest and paper companies need to significantly increase profits, and/or significantly reduce capital employed. Both of these measures require a fundamental change in the way business is conducted. The traditional business model (harvest, manufacture, sell and ship) will not suffice.
The second factor contributing to the lack of shareholder value is industry fragmentation. The top five global forest companies collectively represent just 29% of global sales. By contrast, the five largest companies in the automobile and energy sectors have a concentration of approximately 80% of global sales. Fragmentation contributes to global overcapacity, poor price discipline and the inability to determine trends within the industry. Consolidation is taking place and is being hastened by the strategic alliances forming in the business-to-business e-marketplace (eg, ForestExpress, Papinet), but the industry has a long way to go.
The third fundamental change in the industry is the rapid shift to a new business model enabled by e-business and the internet. No industry has been left untouched. These changes will bring about huge capital market growth from $20 trillion today to $200 trillion by 2010, according to PwC forecasts.
The new "e" in forest and paper
For forest and paper companies, embracing e-business is an integral step toward achieving true change. According to Forrester Research, not all industries will gravitate to the internet, though. Product fit and readiness for e-business are key determining factors. The best fit for e-business is with highly standardized products, which are easily compared by suppliers, or frequently traded low cost wares that benefit greatly from transaction efficiencies.
E-marketplaces will permeate most deeply in industries that have a high degree of fragmentation, highly cyclical or unpredictable supply/demand and multiple distribution steps. In other words, the forest and paper industry is ripe for e-business.
The majority of forest and paper companies have not yet progressed beyond the initial channel enhancement or "brochureware" stage of e-business. The other stages of e-business evolution are value chain integration, industry transformation and convergence.
Channel enhancement involves using the internet to provide information. This is most typically accomplished by means of a web site offering read-only information about the company and its products. This is a critical stage, in that it establishes a platform for web-based customer contact.
Value chain integration makes the internet a means for electronic interaction among producers, their customers and suppliers. At this stage, the web is used to communicate and coordinate a growing proportion of the players that have a role along the value chain. Online ordering, combined with real-time tracking of order status, is a common service offering of companies in the value chain integration stage.
The industry transformation stage is characterized by dramatic restructuring of the traditional value chain. This may involve eliminating existing intermediaries or conversely, a shift in ownership of the customer relationship in favor of a new entrant to the industry. Adaptation will typically involve outsourcing non-core functions and efforts to create efficiency-based partnerships and alliances.
Convergence is the fourth stage in e-business evolution. Companies will find themselves able to participate across industries after achieving a tight coupling with their customers and virtual integration with all contributors to their value chain.
Convergence opportunities will initially be found at the boundaries, where the borders between related industries are blurred. Examples include electricity and gas companies leveraging their concentration to customers by brokering or providing other services such as insurance, banking or home improvement. No such examples currently exist in the forest and paper industry. There are, however, signs of outsiders beginning to elbow their way into the value chain. For example, Enron, a large US energy company, has been buying production assets, taking risk management positions and creating e-markets in the forest and paper industry.
Slow to go
So far, forest and paper companies have been slow to embrace e-business. In 1999, PwC began surveying forest and paper web sites to get some insight on the industry's view of e-business. The survey was repeated again in 2000. The results suggest that few companies have progressed very far in adopting e-business into their organization. Most forest and paper companies are only dabbling in e-business with sites that are largely brochureware. Taken together with the explosion of e-market places and other dot.com industry players, this reluctance to embrace e-business will put traditional forest and paper companies at risk of losing their share of the value chain.
E-commerce in the forest and paper industry is almost a year behind that of chemicals and steel, according to UBS Warburg. A major reason for this lag is that the technology for e-commerce is not yet in place. Unlike leading chemical companies, most forest and paper organizations do not yet have advanced enterprise resource planning (ERP) systems.
The potential for e-business success is huge, though. The global forest and paper industry represents a supply chain of approximately $750 billion. Some 25% of industry revenues could be transacted over the internet by the end of 2004, with a forecast of $33 billion of direct internet sales in the US (13% of industry revenues) and $30 billion of e-marketplace sales (12% of US revenues).
The forest and paper digital landscape has been rapidly populated by e-marketplaces. This includes not only the fast moving dot.com startups, but also traditional companies who want to capitalize on the benefits of the integrated supply chain value proposition.
There are industry verticals (ie, dot.coms that concentrate on the forest and paper industry) and horizontal players (ie, dot.coms that operate across industries and focus on a special area such as logistics and procurement). Recently, there have been pure plays announced by the industry itself (eg, ForestExpress). These e-marketplaces could motivate the industry to adopt the standards necessary to facilitate end-to-end supply chain integration.
There are more than 50 internet players trying to help forest and paper companies move through the stages of e-business evolution. These dot.com e-brokers function as intermediaries that provide buyers with information and allow them to place and track orders. The intermediaries offer a range of business models with a variety of value propositions. With the technology stock market corrections in 2000 drying up sources of capital, many of these companies are beginning to run out of financing. The race is on to forge alliances and build volume behind the e-marketplace value proposition, or perhaps perish.
Strange bedfellows
In March 2000, the three largest North American competitors - International Paper, Georgia-Pacific and Weyerhaeuser - joined forces to develop an independent, global, business-to-business marketplace that will bring buyers and sellers together online. Mead has recently announced its participation. Such an alliance is highly unusual in the paper and pulp industry, as is its openness to accepting new partners.
The new company, ForestExpress, plans to simplify transaction processes, improve information flow and increase the speed of delivery. PwC predicts that other industry players will join forces in the next few years, followed by consolidation and an inevitable shakeout.
The dot.coms will experience their own consolidation and shakeout, and will eventually converge with the alliances, producers and distributors. When the dust settles, there may be only a few forest and paper e-marketplaces left standing. Major customers will also enter the arena and align themselves with channel partners.
Finally, traditional producers themselves are recognizing that the new business model enabled by e-business and e-marketplaces can work with the more traditional business world. In both the digital and traditional market places, the new business model is making for strange bedfellows.
Opportunities ahead
The potential of e-business to reshape traditional business models is increasingly clear. Savings will be realized in many areas including inventory management, logistics, transaction and administrative costs. But the internet is all about speed. To embrace e-business, forest and paper companies must move quickly and decisively. However, the fundamental changes that come with e-business are so dramatic that a solid plan of attack is critical.
PwC's experience suggests that the three most serious challenges to companies implementing e-business are integrating legacy systems, managing change in the business culture and establishing business processes and industry standards.
In addition, PwC has identified four key issues specific to the forest and paper industry related to the implementation of new e-business models:
- production mindset
- lack of industry standards
- lack of partnering/alliance capabilities
- slow adoption of ERP systems
To overcome the industry's late start in e-business, PwC recommends four ways for forest and paper companies to put the "e" in their business.
Start with strategy. It is critical that customers drive the solution. Their current and future needs will drive business strategy. A strong IT champion is a must. Appoint a group of senior executives to lead the e-business strategy. Gain momentum by targeting quick-wins that prove the company's value proposition.
Determine the enterprise's markets (vertical, horizontal), as well as e-business service capabilities early on. Define customers and the core business that the company wishes to participate in. Be bold and lead. For example, with procurement, a company must move quickly beyond maintenance, repairs and operations to core inputs such as fiber.
Companies must also turn their attention to technology platforms. Forest and paper companies still require customized applications. Serious consideration must also be given to integration within the products and with "back office" systems.
Develop a strategy to successfully manage change within the organization. An e-business solution cannot perform effectively without it. New business processes will need to be designed, others will need to be fixed. Managing cultural changes and skills improvement within the company is the most critical element of a successful implementation.
PwC has identified three different approaches to effectively address the organizational change management challenge - "Bubble In", "Bubble Out" and "Transform".
The "Bubble In" model contemplates using existing expertise within an organization to address e-business. The entity must have top management support and the authority to drive change. This is a popular model in the forest and paper industry. While at first glance this seems like the easiest solution, it has a high risk of failure if the organizational changes to processes and people (including management) require dramatic change. To succeed, the team leader must draw heavily on outside resources to help drive change and to leverage skills and experience in the digital landscape.
Examples of companies following this approach include Stora Enso and UPM-Kymmene in Europe. Kruger, a private Canadian company, has also been successful with this strategy.
The second model, "Bubble Out", contemplates the creation of a separate entity to effect e-business change. This new entity can proceed unencumbered by existing processes and culture and will be free to get the right people and processes to succeed under the new business model. The new company reports to the management of the pre-existing organization. Aligning corporate strategy and directions between the two organizations and then resisting the temptation (by the original company management) to overly influence the new entity's initiatives are key challenges.
A variation of this theme is to acquire an existing dot.com organization. This may be a particularly attractive option as dot.coms become increasingly squeezed to generate revenues as capital reserves run down. Critical in this approach is finding the right fit along a wide range of criteria.
Georgia-Pacific appears to be pursuing this strategy. Indeed, it could be said that all the partners in ForestExpress and other emerging e-market places are implementing a "Bubble Out" approach.
The "Transformation" model has not been adopted by the forest and paper industry. It contemplates the company re-inventing itself into a completely new entity. This will be required if the very core business activity of the organization is threatened.
Out of the woods
The task of developing an e-business strategy in such a dynamic market is immense, but so are the opportunities. The need for immediate action cannot be stressed strongly enough. Forest and paper companies are competing in an industry where web-based trading is taking root at a staggering pace. The window of opportunity is closing quickly. Those who do not accept the new business paradigms and leverage their unique core competencies will not be around to celebrate the exciting $200 trillion capital market that is just around the corner. The challenge is for forest and paper companies to move out of the woods and embrace e-business.
For further information on e-business in the forest and paper industry, contact Andy MacCulloch at andy.macculloch@ca.pwcglobal.com
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