The key to unlocking top and bottom-line growth in the pulp, paper, newsprint and containerboard markets

By Tony Kotler

The pulp and paper industry is highly competitive. Many producers have resigned themselves to the fact that they have little to no pricing power in the market. The widely accepted view is that this is a commodity market and prices (and profits) rise and fall in accordance with supply and demand. But are pulp and paper products all the same? Is it a commodity market? This article describes the current state of competition in the pulp and paper industry and discusses what it will take for suppliers to break out of the commodity trap.

A product or service is a commodity when customers perceive no difference between it and competitive offerings. In such a situation the only basis for choosing between them, and hence the only basis for competition, is price. In any mature market there is a tendency for offerings to become commoditized. As most of us are aware, this tendency exists in the pulp and paper industry. It need not be inevitable, however.
Consider the following case:

Most pulp that goes to market is packaged in bale form. The bales are enveloped with large sheets of the product, tied with heavy gauge anodized steel wires in a perpendicular criss-cross pattern, and delivered to a customer's plant. The wires are subsequently cut, usually at a stage just before the pulp is refined.

Because these steel wires are wrapped very tightly around the pulp bales, they can snap back when cut and injure the person cutting the wire, even if they are wearing appropriate personal safety equipment. These injuries can range from small lacerations to more serious problems such as eye injuries and carpal tunnel syndrome, resulting in OSHA claims and lost work time.

However, a handful of North American mills have begun to package pulp in "wireless" bales. Compared with traditional packaging, this innovation is attractive to potential customers because wireless bales result in fewer injuries to the workers that must cut the wires.

In addition, less manpower is required to process wireless bales. Annual machine and maintenance costs can also be reduced (many mills have invested in de-wiring machines, which can cost between $350,000 and $500,000). Wireless bales are therefore an attractive alternative to the traditional product because they enable mills to improve plant efficiencies and lower their operating costs.

Wireless pulp bales add value to a product by eliminating potential worker injuries and reducing manpower, equipment, and maintenance costs at customer operations.

AVOIDING THE COMMODITY TRAP

Many mills have worked very hard to differentiate their offerings, and the fact is they are not all the same, as the case above illustrates. Some mills package pulp and paper in unique ways, and others produce pulp and paper grades that are more resistant to tears or breaks on printing presses or paper and converting machines, resulting in less downtime. Some provide faster delivery or offer services designed to improve inventory management; and still others provide superior customer service and faster problem resolution - all of which create value for customers, primarily by reducing their costs or by enabling them to better serve their customers.

Slight variations in the product, how it is packaged and delivered, how it is used, and how it is ultimately disposed of, can often dramatically impact customer's costs. Yet most mills have not done enough to document and demonstrate these differences, and more importantly, what these differences are worth to customers. Failure to do so prevents paper and forest products companies from getting the full credit for the value of their products and services, which explains why mills remain stuck in a commodity trap, where the only thing that really matters is price.

However, a small but growing number of mills are taking steps to shift the focus away from price. As a result, several have successfully generated significant improvements in top line growth and profitability.

These incremental improvements were not the result of cost reductions or improved market conditions. These mills were able to measure and quantify the total value of the products, programs, systems and services they offered, compare the economic benefit to competitive offerings, and persuasively demonstrate that they offered greater value to the customer.

The word "value" as used here has a very precise meaning:

Value is the worth, in monetary terms, of the benefits
That a company receives in exchange for the price it
Pays. (Anderson and Narus, "Business Marketing: Understand What Customers Value" in Harvard Business Review, Nov.-Dec. 1998)

Most mills have learned to translate features into benefits (e.g., greater tear and tensile strength = fewer breaks on the press). The next step is to help customers understand what the benefits are worth in monetary terms (i.e., what are greater tear or tensile strength worth…. To what degree do they lead to improved performance on the paper machine and a lower cost per hour?).

The real difficulty is in measuring value and presenting the findings in a way that is compelling to customers. Difficult though it may be, this challenge must be met. To do so, we recommend pulp and paper companies construct what Anderson and Narus refer to as customer value models.

A customer value model is a comprehensive accounting of the value that a supplier delivers, or could deliver, compared with the value of competing products and services. What is truly important and distinctive about customer value models is that they are constructed on the basis of a thorough examination of all the components of the vendor's offering in terms of the impact that the offering has on customers' cost structures or revenues.

This research is conducted with real customers in real usage situations. It thus provides an accurate, data-driven basis for comparing a company's offering with those of its competitors. These models help vendors to make an objective case for why customers - converters, retailers, or other mills - ought to do business with them, rather than competing suppliers.

GETTING STARTED
How are such models developed? Mills should first establish a value research team (VRT). A total of four to five people drawn from sales, marketing, customer service, and operations should be placed on the team and tasked with the responsibility for conducting the field research required to establish what the product or service is really worth.

Once the VRT is in place, mills should conduct an initial set of interviews with current and prospective customers to define all of the ways in which the product or service in question impacts, or could impact, customers' costs (e.g., reduced downtime, less waste and disposal, etc.). It's worth mentioning here that many mills have a fairly good understanding of the benefits of their product or service. Nevertheless, initial interviews such as these help to confirm and deepen this understanding.

CONDUCT VALUE RESEARCH

Following this initial work, site visits should be conducted. Meetings need to be arranged with customer personnel that have an understanding of how the product or service is used, including mill managers, operations, and workers on the floor. The purpose of the site visits is to make more detailed measurements regarding the benefits (e.g., cost savings) customers realize as a result of using the product or service.

FAQs ABOUT CUSTOMER VALUE MODELING

What if the research shows that we do not deliver superior value?
Knowing is better than not knowing. At least you will understand what changes are required in your products, programs, systems, or services to improve the value you deliver.

How long will it take to develop a value model?
It generally takes between 8 and 10 weeks.

Developing customer value models requires working with customers. How can we get their participation?
Before approaching a customer, the team should think through what it will need (specific data requirements, level of cooperation, etc.) from the customer and be prepared to offer an incentive. This is called making a "Gives & Gets" proposal. The opportunity to benchmark is one thing that most customers find appealing. Because research will be conducted with several customers, mills can offer to share all findings in the form of a benchmarking study.

How much commitment is required in terms of people and resources?
It depends. Many companies view this type of project as an opportunity to expose employees, particularly those in sales, marketing, customer service, and product development to the value research process. In this case, these employees would be encouraged to participate in customer interviews and site visits. If employee participation is desired, they should plan on committing an average of three to six hours per week. Other companies, particularly those where resources are already stretched, prefer to let a consultant take responsibility for the data gathering.

In cases were data does not exist, or are not readily available, mills should work with customers to identify how the data would be collected. In some cases, side-by side tests can be run to assess the performance of competing grades on paper and converting machines. In other cases, some form of direct observation or time motion study can be helpful in identifying how customers manage inventory, or the time it takes to repair a break on the press.

Once the necessary information has been gathered, all data, as well as any assumptions made, should be carefully documented. The value of the product or service should then be summarized and compared with the total value of competing products and services. In conducting this type of research, it is a good idea to study a minimum of three to four and perhaps up to six or twelve customer. Doing so provides a good research base from which conclusions can be drawn. It also helps the supplier understand how the value delivered varies across different types of customers.

DRAW CONCLUSIONS AND COMMUNICATE VALUE

Mills that have invested in this research have sometimes discovered that their products and services generate significant cost savings for customers, in some cases upward of $20-$30 per ton. What this means is that for every ton purchased, customers receive $20-$30 in value. However, mills need to effectively communicate this value to customers.

Generally, the best way to do this is to document all of the information in a spreadsheet (such as MS Excel, or Lotus 123). The spreadsheet serves as an effective sales tool because it allows the salesperson to present and explain, in a clear and concise fashion, all of the ways in which the product or service generates cost savings or increased revenues for customers, and the magnitude of such savings or revenue growth. Data can also be easily exported to presentations done in PowerPoint, or incorporated into proposals and bids.

While customers will generally insist that paper and pulp products are all the same, the aforementioned research can help mills overcome such objections and skepticism. Armed with such research, mills have been able to improve their bottom line, either by negotiating higher prices for their products or by gaining a greater share of targeted account.

BENEFITS OF VALUE MODELS

Paper and forest products companies that employ this approach can benefit in a myriad of ways. The specific benefits of building value models are many:

Customer Value Models are not easy to build, but the experience of a growing number of progressive companies in the paper and forest products industry suggests that value research must increasingly be considered a necessity, especially during periods of slow growth and rapidly deteriorating price levels.

About the author: Tony Kotler is director of Kotler Marketing Group. He can be reached at Email: tkotler@kotlermarketing.com