Conference Report

Sponsored by P&P and Andersen Consulting, this management conference focused on how top-level executives can create better value in their companies

Executive Forum Offers Advice
for Shaping Industry's Future

BY KIRK J. FINCHEM,
Technical Editor

Conference Report

Shaping the future or defending the past?' was the theme of the first International Forest Products Executive Forum, sponsored by Pulp & Paper and Andersen Consulting in association with Jaakko Pöyry Consulting. But there were few, if any, 'defenders' among the approximately 70 conference participants that gathered during the first week of October in Pinehurst, N.C.

Rudi Dornbusch, the Ford International Professor of Economics and International Management at MIT in Cambridge, Mass., kicked off the conference with a whirlwind tour of global economic issues. After pointing out that the U.S economy was currently enjoying low inflation and near "full employment," he cautioned, "Things cannot stay this way."

Dornbusch explained that inflation was the usual "killer of economic expansions," and that the current expansion would likely end when economic growth increases too quickly and inflation re-emerges, spurring the Federal Reserve Bank into action. As for the reason that inflation has been slow to emerge during the current expansion, Dornbusch explained that inflation typically first crops up at "bottlenecks" in the economy, and that "the flexibility of the U.S. economy had done a good job of holding inflation in check."

Citing the effects of world events (e.g., attacks on Asian currencies, pending attacks on Latin American currencies, and slowing growth in developing economies) on the U.S. stock market, Dornbusch predicted the scope, but not the timing, of this October's plunge in the U.S. stock market, drawing analogies to the October 1987 shakeout. "But," he was quick to add, "look what happened on the third day. Buyers began to snap up bargains."

FOREST PRODUCTS TOUR. Dornbusch's global economic tour was followed up by a similarly quick-moving tour of the global forest products business, presented by Mike Sullivan, vice president, Inland Paperboard & Packaging in Indianapolis and a team from Jaakko Pöyry. During his presentation on the North American forest products industry, Sullivan emphasized the importance of managing risk by building manufacturing capacity after building product demand.

David Walker of Jaakko Pöyry's Singapore office predicted that Asia-as a region-would continue as a net paper importer through 2010, while being a net exporter of hardwood kraft pulp, free-sheet, and newsprint grades. He also cited the growing demand of global paper customers like the Coca-Cola Co. and Procter & Gamble for high-quality products in Asia, going on to explain that low-cost Asian producers can be expected to pursue, increasingly, these value-added business opportunities.

Walker pointed out that Asian producers were attracting a great deal of debt capital, leaving a number of projects (both forest products and more mainstream infrastructure projects) highly leveraged. The long-term effects of recent financial upheaval on these highly leveraged projects remains to be seen.

IT TRENDS. The conference moved on to examine the transformational effects of information technology (IT). The session, Using Information Technology to Radically Transform Business, was kicked off by Don Tapscott, author of several visionary books on information technology and digital commerce. Tapscott spoke on the effects of information technology on changing authority patterns within companies and the shift of organizations from "work environments" to lifelong learning environments.

Tapscott's presentation was followed by Bill Blankenship, vice president of Weyerhaeuser Co. in Tacoma, Wash., who discussed the use of information technology to better meet customers' needs. According to Blankenship, Weyerhaeuser's goal of "making a 'perfect door at a competitive price' was a recipe for financial disaster." Advanced information technologies were implemented, which allowed Weyerhaeuser to better understand its customers' needs and eliminate redundant information handling.

FOCUS ON CHANGE. Jack Kemp, former U.S. congressman, U.S. secretary of Housing and Urban Development, U.S. vice presidential candidate, and chairman of the National Commission on Economic Growth and Tax Reform, delivered the conference's keynote address. During his talk, Kemp presented his views on the changing global political climate and shared his vision of the "boundless opportunity and growth without limits for America and free trade for the world."

"Leading Organizational Change" was the subject of the conference's second day. Noel Tichy, director of the Global Leadership program at the University of Michigan at Ann Arbor, and author of Control Your Destiny or Someone Else Will-How Jack Welsh is Making General Electric the World's Most Competitive Company, spoke on the new competencies that are needed for forest products companies to navigate change and prosper into the next century.

Tichy emphasized the need for companies to focus on developing leaders rather than focusing on "developing corporate cultures," suggesting that "having more 'leaders' as opposed to administrators at more levels of the organization than its competitors" should be a high priority goal for firms aspiring to superior performance.

He also discussed the importance of having company leaders-specifically senior executives-actively involved in teaching the company's next generation of executives. Citing several examples of Fortune 500 firms, including Pepsico and General Electric, he explained that effective senior leadership programs have three key ingredients:

A proven leader heads the effort.

A small, select group of participants work with the leader over time.

Real business projects put the participants at risk as they apply what they learn.

Tichy's presentation was followed by Jerome Tatar, president and CEO of Mead Corp. in Dayton, Ohio, who spoke about his company's comprehensive and long-running change program. Characterizing Mead's financial performance as average-subject to the industry's boom-bust business cycle-in 1992, Tatar explained that Steve Mason, the company's CEO at that time, wanted to transform the firm into one that would prosper independent of business cycles and commodity prices.

Beginning with a simple vision-"We want to be a great company"-Mead set its sights on building shareholder value by being preeminent in customer satisfaction in the markets it chose to serve. After a transition period which included spinning off "non-core" businesses and assets and moving to "shared services," Mead emerged in the late 1990s as a shareholder value-driven company.

SHAREHOLDER VALUE. The discussion of creating shareholder value carried over into the conference's third day with presentations by Jack McGovern, executive vice president and CFO of Georgia-Pacific in Atlanta, Ga.; Brad Rosencrans, managing partner of Andersen Consulting's global forest products practice; and Sherman Chao, first vice president and managing director at Merrill Lynch in New York.

McGovern discussed the implementation of Economic Value Added (EVA) analysis at Georgia-Pacific and its effect as the company's primary performance measurement. He explained that G-P's acquisition of Great Northern Nekoosa in the early 1990s and the coincidental drop in paper prices focused the company on repaying the debt incurred during the acquisition. This change in focus underscored for G-P executives the importance of the company's earning its cost of capital rather than expanding manufacturing capacity or increasing market share. The change also includes a shift from using "standard accounting numbers to using actual market numbers" in measuring the value of assets and resources. This change in measurement was one of the factors in G-P's recent spinoff of its timber resources into a separate company.

Rosencrans shared the results of Andersen's research on shareholder value within the forest products industry, discussing the factors that emerged as critical to remaining competitive and aspiring to be an industry leader in the global marketplace. These factors (see related story in P&P, February 1997, p. 67) include market focus (i.e., having more focus on particular market segments and dominating those segments), well-timed capital deployments aimed at meeting the needs of very specific customer segments, and superior project execution.

Chao, a highly respected industry analyst, presented the shareholder view of "creating value," explaining that creating value should be the ultimate goal of the changes executives make in their organizations. He also explained the somewhat varied motives of financial stakeholders, including the following:

Investors simply want maximum returns at minimum risks.

"Money managers" want stocks that outperform the market. In "up markets" they want stocks that increase in value faster that the market average. In "down markets" they want stocks that "hold their value" better than the market average.

Securities brokers and dealers want to deliver superior investment ideas-advice to buy undervalued stocks and sell overvalued stocks.

According to Chao, "People generally love 'buy' advice and hate 'sell' advice." As a consequence, Wall Street has a general bias toward recommending stock purchases and against disposing of stocks that are likely to underperform the market. This bias, in combination with various institutional diversification strategies, has lead to the current valuation of company stocks despite the meager value creation performance of the sector.

But, also according to Chao, there are strong reasons to believe that improved performance on the part of many forest products companies is on its way. These reasons include the general trend toward producer consolidation and the increased focus on value creation as an organizational goal.