The Evolution of Competitive Strategies in Global Forestry Industries: Comparative Perspectives (World Forests)

THE EVOLUTION OF COMPETITIVE STRATEGIES IN GLOBAL FORESTRY INDUSTRIES

The Evolution of Competitive Strategies in Global Forestry Industries Comparative Perspectives Edited by

JUHA-ANTTI LAMBERG Helsinki Univesity of Technology, Finland

JUHA NÄSI Tampere University of Technology, Finland

JARI OJALA University of Jyväskylä, Finland and

PASI SAJASALO University of Jyväskylä, Finland

A C.I.P. Catalogue record for this book is available from the Library of Congress.

ISBN-10 ISBN-13 ISBN-10 ISBN-13

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TABLE OF CONTENTS

Foreword

vii

List of Contributors

ix

Chapter 1 Evolution of Competitive Strategies in Global Forestry Industries: Introduction

1

PART I

JUHA-ANTTI LAMBERG AND JARI OJALA

PART II Chapter 2 The Giant: International Paper 1898—2000

31

JUHA-ANTTI LAMBERG

Chapter 3 A Company and The State: Enso-Gutzeit

45

JUHA-ANTTI LAMBERG

Chapter 4 Comparing the Strategic Evolution of Georgia-Pacific, 65 Mead, and Weyerhaeuser ANNA AHOLA

Chapter 5 The Challengers: Kymmene, United Paper Mills, and Metsäliitto

107

JARI OJALA AND JUHA-ANTTI LAMBERG

Chapter 6 Strategy Formation in the Swedish Forestry Industry: 141 Comparing SCA and MoDo ANDERS MELANDER

Chapter 7 Two Family Firms in Comparison: Ahlström and Schauman during the 20th Century

167

JARI OJALA AND KALLE PAJUNEN

Chapter 8 Entrepreneurial Organization or Family Firm? 191 A Strategic Analysis of Gulf States Paper Corporation PATRICK M. KREISER

vi

TABLEE OF C ONTENTS

PART III Chapter 9 Managerial Cognition and Action in the Context of the Forestry Industry

205

PASI SAJASALO

Chapter 10 Consolidation by Game-Playing: A Gamesmanship Inquiry into Forestry Industry

225

JUHA NÄSII, PASI SAJASALO

PART IV Chapter 11 The Ephemera of Success: Strategy, Structure and Performance in the Forestry Industries

257

JARI OJALA, JUHA-ANTTI LAMBERG G, ANNA AHOLA, AND ANDERS MELANDER

References

287

Appendix Competitive Activities of Forestry Industry Firms: A Coding Manual for Event History Analysis

307

JUHA-ANTTI LAMBERG G, JUHA LAURILA, AND TOMI NOKELAINEN

Index

313

FOREWORD

All industries cease to exist after their life cycle approaches the end in which the old modes of action create legitimacy no more. Our initial motivation was to analyze the entire life cycle of the global forestry industry both in order to attain a better historical understanding and a more educated perspective about the future of the industry. The first versions of the book chapters were presented at the European Business History Association’s annual meeting in Oslo 2001. The importance of this occasion has been paramount for the project and we gratefully acknowledge the support and comments by Professors Sverre Knutsen, Knut Sögner, and Matthias Kipping. Already earlier two persons had taken up the important role of supporting and mentoring the idea to study competition from a longitudinal perspective. Without Professor Jyrki Kettunen and Ms. Christine Hagström-Näsi this book would not have been realized. Christine’s role was also important from the perspective that Finnish Technology Agency Tekes has sponsored projects that have devoted resources for this book project. Finnish Academy’s support has also been crucial. Reflecting the interdisciplinary nature off the research team, we have received comments and support from a variety of colleagues along these years. The list of persons we can thank here can not be exhaustive, but we would like to at least acknowledge the role of Professors Jorma Ahvenainen, Antti Ainamo, Jari Eloranta, Petri Karonen, Tomi Laamanen, Peter Murmann, Saku Mäkinen, Matti Palo, Grant Savage, and Henrikki Tikkanen. The advisory board in the Tekes projects, consisting of the managing directors of a number of Finnish forestry industry firms and governmental officers, has provided us useful comments. We owe our gratitude to Seppo Suuronen, Aila Maijanen, Kenneth Hernberg, Tero Kaleva, Marjariitta Rahkila, Jorma Saarikorpi, Riitta Salo, Markku Silenius, Leena Paavilainen, Reima Sutinen, and Juhani Kyytsönen. During the years of completing this process many assistants have helped us in collecting and storing the information, and some of them have already received their Ph.D’s. From m this group we would like to thank especially Mika Skippari, Kalle Pajunen, Manu Aunola, Maare Valtonen, Pasi Saarimäki, Riku Kaistinen, and Vesa-Pekka Grönfors. Anne Kuivalainen performed an extensive amount of work in completing the book’s layout. Strategy is manifested in all phases of a company’s evolution and finally, strategy becomes a story of the company’s past actions. It is the last aspect we have addressed in this book. However, all the dimensions of strategy are intertwined in such a complex way that it may be unnecessary to maintain any demarcation lines between intention, action, and history in the traditional sense. Thus, we hope the book would be of interest for a variety off readers in the academia and business – it was fun to make and hopefully equally fun to read! Helsinki – Jyväskylä – Tampere, June 2005 The Editors

LIST OF CONTRIBUTORS

MS. ANNA AHOLA is a doctoral student at the Helsinki University of Technology, at the Institute of Strategy and International Business. Her major research interests include forest industry, industry evolution, and competitive dynamics. Her doctoral thesis will further elaborate the themes of industry evolution and competitive dynamics in the American forest industry setting. R is Assistant Professor of Management Systems at Ohio DR. PATRICK KREISER University. He received his PhD in Strategic Management and Entrepreneurship from the University of Alabama in August 2004. His primary research interests include Corporate Entrepreneurship, Entrepreneurial Orientation, and Firm Performance. His research has been published in numerous journals, including Entrepreneurship Theory and Practice, Journal of Business Research, and Management Decision.

DR. JUHA-ANTTI LAMBERG is a researcher and lecturerr at Helsinki University of Technology. He received his Ph.D. from economic history at University of Jyväskylä. His research interests include organizational change, history and theory of strategy and institutional theory. He has published articles in Business & Society, Human Relations, European Management Journal, Management Decision, Scandinavian Economic History Review, International Studies of Management & Organization and other journals. DR. JUHA LAURILA is a Senior Research Fellow (Academy of Finland) in Management and Organization at the Helsinki School of Economics, Finland. He has published articles in the Journal of Management Studies, Organization Studies, The International Journal of Human Resource Management, the Scandinavian Journal of Managementt and other journals. He is also the author of Managing Technological Discontinuities and co-editor of Technological Change and Organizational Action (both Routledge, 1998 and 2003). DR. ANDERS MELANDER R is a Research Fellow/Assistant Professor at Jönköping International Business School. He has a PhD in Business Administration. His research focus on the role of industrial wisdom in strategic change and the strategic network as a vehicle to achieve strategic marketing development. His publications include: Industrial Wisdom and Strategic Change The Swedish Pulp and Paper Industry, 1945-1990, (Diss.). and articles in compilation works and journals such as International Studies of Management & Organization.

x

LIS I T OF C ONTRIBUTORS

DR. JUHA NÄSI is a professor of Industrial Management and Strategy at Tampere University of Technology. Professor Näsi has written, co-authored, and edited several volumes and compilation works related to strategic management, including Arenas of strategic thinking g (1991), Understanding stakeholder thinkingg (1995), and Management tensions and configurations (2002). His total number of written productions exceeds 250 publications. M.SC. TOMI NOKELAINEN, Tampere University of Technology. Tomi Nokelainen works as researcher and lecturer at the department of industrial engineering and management preparing his dissertation “A Taxonomy of Competitive Actions”. His teaching area encompasses technology management and technology assessment. DR JARI OJALA, is a senior assistant at the department of history and ethnology, University of Jyväskylä, Finland. He is a docent in economic history, specializing in business history. His research includes long term development in business enterprises, maritime history, international trade, and the coevolution of business and society. He is the Editor-In-Chief of Scandinavian Journal of History, and has written a number of articles to journals such as European Review of Economic History, International Journal of Maritime History, and Scandinavian Economic History Review. DR. KALLE PAJUNEN received his Ph.D. in strategic management from Tampere University of Technology, where he is currently working as a senior researcher. He also holds M.A. in economic history from University of Jyväskylä. His research interests include research methodologies, philosophy of social sciences, decline and turnaround processes, internationalization processes, stakeholder theory, strategic leadership and business ethics. His latest articles appear for instance in Advances in Strategic Managementt and Journal of Business Ethics. DR. PASI SAJASALO holds a PhD in management from the University of Jyväskylä, Finland where he currently serves as the senior assistant of management. He also serves as an adjunct professor of corporate strategy at the Lappeenranta University of Technology, Finland. His main research interests lie with the internationalisation and strategic management of forest industry and media industry companies in addition to cognitive aspects of strategy. Some of his recent publications on forest industry include: Strategies in Transition – The Internationalization of Finnish Forest Industry. (Diss.) University of Jyväskylä; and number of articles published in Journal of International Business Research.

CHAPTER 1

EVOLUTION OF COMPETITIVE STRATEGIES IN GLOBAL FORESTRY INDUSTRIES: INTRODUCTION

JUHA-ANTTI LAMBERG Helsinki University of Technology e-mail: [email protected]

JARI OJALA University of Jyväskylä e-mail: [email protected]

There are few issues more vital and interesting in strategic management than that of a competitive battle where the once leading companies are dethroned from their position by the rise of new market leaders (Ferrier, 2001). Industries differ, however, considerably in terms of the frequency and scale of competitive actions, aggressiveness and the length of such battles (Smith, Ferrier, & Grimm, 2001). In less mature industries competitive battles and processes leading to changes in market structure are hectic and can occur over a period of months or even years (Porter, 1980; Rindova & Kotha, 2002). In more mature and capital intensive industries the duration of radical changes in competitive structure can be measured in decades and the amount of competitive actions is scarce vis-à-vis more intensive settings (Klepper, 1996; Murmann, 2003b; Rose, 2000).

1 Juha-Antti Lamberg, Juha Näsi, Jari Ojala, and Pasi Sajasalo (eds.), The Evolution of Competitive Strategies in Global Forestry t Industries: Comparative Perspectives, 1–29. © 2006 Springer. Printed in the Netherlands.

2

JUHA-ANTTI LAMBERG AND JARI OJALA 1400 1200 1000 800 600 400 200

1910 Europ e

1950 North America

1974 Asia

2000 Finland and Sweden

Sources: Database of Paper and Pulp companies of the world compiled by the authors. The database is available at: http://www.cc.jyu.fi/~jaojala/. The Number of Cases is presented in Tables 1.1 and 1.4 and information about the sources in section “Data”. Note: the dash line refers to all companies in population.

Figure 1.1. Average annual paper production in European, North-American, Asian, and Nordic (Finnish and Swedish) companies 1910, 1950, 1974, and 2000 (thousand tons).

The paper and pulp industry is an archetypical example of a mature industry that has evolved through the constant increase in competitive intensity from the late 19th century onwards into a global rivalry between a few dominant firms in the early 21st century. As the Figure 1.1 partly illustrates, through constant imitation of their North American competitors Nordic companies have been able to catch up the traditional market leaders in terms of profitability, volume (Figure 1.1) and productivity (Lamberg, 2005; Lamberg & Ojala, 2005). The main purpose of this book is to analyze this process from the perspective of the strategic actions undertaken by Nordic and U.S. companies. Consequently, we focus on the a) company-level evolution of strategies, b) co-evolutionary interplay between firms and their institutional and competitive environment and c) on the differences and similarities between individual firms and nations. Four elements of evolution are especially important to understanding the dethronement processes. First, we analyze firms from a variety of national contexts. This makes the comparisons relevant from the point of view that the nationality of the firms may explain differences in performance and strategy. Second, our sample includes firms with different governance structures. We analyze publicly traded, family owned and state owned firms as well as cooperatives. Accordingly, the related research question focuses on how the ownership structure is manifested in strategic actions (Chen & Hambrick, 1995; Miller & Chen, 1994). Third, we study

EVOLUTION OF COMPETITIVE STRATEGIES IN GLOBAL FORESTRY INDUSTRIESS

3

the firm-specific strategy profiles. Thus, the study results in new information on how firms compete vis-à-vis industry trends and what reciprocal effects this has on performance. Fourth, and perhaps most importantly, we study the path dependent strategic processes (Puffert, 2002) leading to success and failure of firms thus seeing the performance outcomes as a function of firms’ history and current competitive and institutional environment. This chapter now proceeds as follows. First, we present the theoretical and conceptual underpinnings of the book focusing especially on industry evolution, competitive dynamics and path dependence. Second, we focus on the industry and especially on the industry dynamics by describing the trends in production volume and focus, technological regimes and changes in the competitive structure of the industry. Third, we explain the methodological issues regarding the case studies and cross-case comparisons and finally, we shortly describe the structure of the whole book. 1 THEORETICAL BACKGROUND1 Evolutionary patterns of firms and the dethronement processes in an industry are issues that are not easily uncovered via one specific theoretical perspective (Murmann, 2003a; Murmann & Homburg, 2001). Instead, the understanding of such issues requires broad and context-specific theoretical apparatus (Colli & Rose, 1999; Rose, 2000). At best, such a framework can shed light on each specific case and on the overall explanation of the industry evolution in the context of forest industries (Lamberg & Ojala, 2005). In this book, we focus on three interrelated conceptual perspectives. First, the strategic actions of firms constitute the dynamics of competition in our specific research setting. Second, the principle of path dependence helps to understand the constraining power of history, institutions and the competitive / technological environment on firms’ strategic action and evolution. Finally, the different governance structures of the firms potentially drive strategic actions and, for example, deviate family firms from the larger publicly owned companies in terms of their strategic actions and performance (Chen & Hambrick, 1995). In the next sections, we offer a brief overview of these issues which will be deepened and enhanced in the context of the empirical cases. 1.1 Strategy, Evolution and Competitive Dynamics In this book, strategy is simply defined as the pattern of actions over time. Regarding evolution, we follow Greve (2002, p. 558) who defines evolutionary explanation as “[…] historical contingency, that is, early events […] are consequential for the subsequent evolution and to some degree arbitrary. [Also], the mechanisms of evolution are systematic and consequential, since diffusion processes predictably cause practices to spread throughout a population.” Accordingly, strategy evolution is seen as a product of competitive actions and reactions. 1

An earlier version of this section was published in Juha-Antti Lamberg, Strategic Action and Path Dependence: Profiles and Archetypes of Competitive Behaviour in a Global Industry (2005).

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JUHA-ANTTI LAMBERG AND JARI OJALA

Following Miller and Chen (1994), by competitive action we refer to “…a specific and observable competitive move, such as new product introduction, an advertising campaign, or price cut, initiated by a firm to improve or defend its relative competitive position.” We essentially see that these actions are manifestations of the structural and cognitive configurations of the firms as well as constantly shaping these configurations along firms’ evolution. Various research streams of which the most notable is the ‘Maryland-project’ have laid out this competitive dynamics logic (Chen & Hambrick, 1995; Chen & Miller, 1994, 1996; Ferrier, Smith, & Grimm, 1999; Hambrick, Cho, & Chen, 1996; Miller & Chen, 1994). During the 1980s—1990s, a group of researchers studied competitive actions mainly in the context off the U.S. airline industry. In essence, researchers found that the repertoire of competitive actions was relatively limited, that actions correlated with the market position and economic resources of the companies and that the industry level dynamics emerged as a consequence of the bilateral action—reaction pairs between competitors (Smith, Ferrier, & Ndofor, 2001). In a mature industry that has been divided into relatively separate market areas (U.S. and Western Europe being the most relevant from our perspective), it cannot be expected that intensive rivalry between competitors, at least in a global setting before 1980s, would materialise. Figure 1.2, building on Chen (1996), illustrates the continuum from firm-specific isolated development processes to the more intensive competitive setting between firms from different national contexts.

High

Commonality In Product Market

Low

Downstream Rivalry: Constant competitive interaction in the product market

Intensive Rivalry: Constant competitive interaction between the firms

High Independency: Marginal competitive interaction between the firms

Low

Similarity in Resource Market

Upstream Rivalry: Constant competitive interaction in the raw material market

High

Figure 1.2. Dimensions of Competitive Rivalry.

Accordingly, we may expect that at least in the global setting the level of rivalry was very low until the 1990s. In geographically constrained areas, such as Finland or Canada, the competition potentially focused on crucial resource markets and in

EVOLUTION OF COMPETITIVE STRATEGIES IN GLOBAL FORESTRY INDUSTRIESS

5

particular on lumber. Moreover, the existence of national cartels in Europe seemingly filtered the competitive intensity in the European product market until the 1980s. Thus, the concentration on firm-specific strategic actions tells more about the firm-level evolution than about the intensity or nature of competition as such. Perhaps unconventionally, we emphasize that past actions have to be seen as contingencies to present strategic decisions. This leads us to the concept of path dependence. 1.2 Path Dependence During the latter part of the 1990s and at the beginning of 2000, the concept of path dependence was transferred from economic history and new institutional economics to strategic management research. The term has been used for example in building research models to study internationalization and technological development and to explain first-mover advantage (Barnett, Mischke, & Ocasio, 2000; Eriksson, Majkgard, & Sharma, 2000; Mueller, 1997; Schilling, 1998). Generally, path dependence has been used in contexts where the purpose is to generate dynamic and evolutionary perspectives on organization and management research (Barnett & Burgelman, 1996). The basic idea in path dependency is that processes are not only contingent on the context in which they occur, but also on their own histories (Arthur, Ermoliev, & Kaniovski, 1987). Paul David (2001) has defined path-dependent processes as contingent and non-reversible. Furthermore, he has underlined that events happen, but never un-happen. The positive definition of path dependence would thus be: A path-dependent stochastic process is one whose asymptotic distribution evolves as a consequence (function) of the process’ own history. (David, 2001)

Paul David’s definition has been criticized for its empirical background in the QWERTY – discussion and regarding the legality of different degrees of path dependence (David, 2001). Nevertheless, together with Brian Arthur’s contribution David’s basic definition offers a meaningful perspective by which to understand the antecedents of strategic action (Arthur, 1989, 1990, 1993, 1997; Arthur et al., 1987). For example, Arthur’s notion that innovations (in the technological sense) result from new combinations of existing technologies is easily transferable to the uncovering of patterns of strategic actions (Arthur, 1989). Furthermore, path dependence (as a concept) allows the possibility to import principles of complexity theory into strategy research. For example, the assumption that small events may create uncalculated tremors somewhere else is evidently a valid perspective in explaining various evolutionary processes leading to certain firm specific behavioural patterns (Brown & Eisenhardt, 1997; Stacey, 1995). For this study, the concept of path dependence links together both theoretical aspects from strategic management literature and empirical explorations from the case studies2. A crucial suggestion is that strategy processes have a path dependent 2

It should be noted that there exists strong opposition to using complexity science as a metaphor. (McKelvey, 1999)

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character: past decisions shape the set of possible strategies in the future (David, 1986; North, 1990). Thus, strategic action is seen as contingent on both environmental factors (institutions, competition) and the historical strategic paths. Therefore, the historical experiences of organizational actors shape their interpretations of the environment3 and create trajectories for future actions. As said, the primary empirical goal in this study is to analyse how firms have behaved strategically during environmental changes and what role implemented strategic actions have played in organizational development. For further analysis, the independent contextual factors that have affected f the historical development of the case companies are divided into three groups: competitive environment, (interorganizational) institutional environment and intra-organizational level. The main argument is that both competitive and institutional elements affect organizations’ strategy processes in addition to their own historical experiences. In different evolutionary or co-evolutionary models the environment is seen either as the ultimate determinant of organizational behaviour or as a macro-level context that might slowly change as a consequence of the micro evolution inside organizations (Burgelman, 1994; Lewin & Volberda, 1999). Our perspective on strategy evolution accepts the strong impact of environmental variables but takes into account both the influence of strategic choices and the processes’ own histories, i.e. the path-dependent dimension. This dialectic approach is argued to improve existing process models by integrating the time, timing and history into the organization—environment dialogue. Thus, the perspective takes into account the possibility to make strategic choices, but that once they are made, they cannot be repeated. The aim is to use the conceptual framework to highlight possible factors affecting firms’ strategy processes and historical development. Moreover, the emphasis is to help to interpret firm-level strategic choices. Hence, institutional and competitive elements are imbedded into the study t as explanatory factors but they are not measured as variables causing organizational decisions. Rather, competitive and institutional environments create the context in which organizations operate (Alston, Eggertsson, & North, 1996). Organizations in general and firms in particular, however, are independent entities strongly affected by their governance structure and management. 1.3 Governance Structures in the Forest Industry As Holmström and Roberts (1998) argue, ownership patterns are not determined by relation to specific circumstances, but rather due to the wide variety of circumstances, long time span, and path dependent processes. This can be detected also in the case of forest industry firms. Most of the firms originated as family owned enterprises; some of them evolved into becoming limited liability companies, 3

Compared to classic organization theory that sees the organizational decision-making as a function of organization’s previous history (“…the t behaviour of an organism through a short interval of time is to be accounted for by its (1) internal state at the beginning of the interval, and (2) its environment at the beginning of the interval…determine…the behaviour…what the internal state will be at the next moment of time.”). (March & Simon, 1963)

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and a few into multinational corporations with an international – sometimes even institutional – ownership structure. The era of family owned firms seems to be over in the case of the larger companies. That can be detected also from the articles in this volume. However, small and medium sized, mostly family firms are still important to the forest industries especially in small niche markets that require constant innovations and consistency in actions. The evolution of the ownership has developed in line with the overall economic development. The paper and pulp industry firms were mostly founded during the age of industrial capitalism, they emerged and grew domestically through organic growth, mergers, and acquisitions during the era of financial capitalism, and finally, internationalisation of operations occurred during the age of global capitalism during the post war era (Cantwell, 1989; Chandler, 1977, 1990). The origins of today’s paper industries can be traced to the late 19th century, when paper mills started to use softwood fibre as raw material. Typical companies were small, basically one-mill companies and situated near raw materials and an adequate energy supply (Minami, 1977). As Skelton stated at the beginning of the 20th century, paper and pulp production was (and partly still is) dependent on four factors, namely: 1) a cheap and convenientt supply of spruce; 2) a cheap and ample supply of water power to operate heavy pulp-grinding machinery; 3) water of a quality suitable for use in mixing pulp; 4) cheap routes to markets (Skelton, 1906). Together these features determined the early geographical location of paper and pulp industries during the age of industrial capitalism. In the United States as a consequence of massive mergers and reorganisation, banks gained control of the major industries during the late 19th century. The first merger wave occurred in the paper and pulp industries at the turn of the 19thh and 20th century – the mergers were financially supported by the financial institutions. For example, giants such as International Paper and Enso were created during that period (Skelton, 1906; Ahvenainen, 1992a). In the U.S. between 1912—1939 bank control had already faded away due to political reaction against financial institutions (Simon, 1998; Fligstein & Feeland, 1995; Davis & Mizruchi, 1999).Though similar actions were taking place also in several other countries, in order to weaken the influence of financial capitalism, the financial institutions still retained a vital position within the business world, being at the centre of the networks of the economic actors up until the 1980s and 1990s (Davis & Mizruchi, 1999; Mizruchi, 1982, 1992; Mizruchi & Stearns, 2001; Buchinsky & Polak, 1993; Neal, 1990; Simon, 1998). The rise of multinational corporations marked the end of financial capitalism during the late 20th century: within global capitalism the multinational companies are in many cases much larger than the domestic financial institutions (Cantwell, 1989; Cassis, 1997). The globalisation period within forest industry production started rather late which can be detected also from the case studies analysed in this volume. Though the markets for forest industry products, especially for Nordic companies, have been mainly abroad, production has continued on a domestic basis (Heikkinen, 2000; Sajasalo, 2003).

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2 INDUSTRY DYNAMICS In this anthology the focus is on the competition between big players in forest industries. Still, the forest industry is combined by a number of players in global terms, most of them being small and medium sized companies. This is evident especially if we look at the forest industries as a whole, bringing for example sawmills into the picture (Alajoutsijärvi, Holma, Nyberg, & Tikkanen, 2005). However, also within the paper and pulp industries a number of small and medium sized companies exist, which can be detected from the database compiled by the authors (See Table 1.1 – more information about the database in section “Data”). For example, at the beginning of the 20th century there were way over 4 000 paper and pulp producers in the world. By the end of the century this figure dropped below 2000. Though the forest industry sector, especially the paper and pulp production sectors, seem to have concentrated significantly, the concentration is still lagging behind many other lines of businesses. For example, in 1992 the top-five paper companies produced one-fifth of the total paper production, whilst in the carindustry the same share was almost 60 per cent (Diesen, 1998). The ten largest European paper industry companies produced less than a third of the total European sales in 1980, whilst by the mid-1990s the share was already around one half. In the United States, the concentration started earlier: the top-ten paper industry companies produced already by the mid-1980s half of the total sales. The number of paper and pulp producing companies decreased in the United States from 641 companies at the beginning of the 1960s to 241 companies by the beginning of the 1980s, due to the mergers and acquisitions (Diesen, 1998; Jokinen & Heinonen, 1987; Moen & Lilja, 2001; Peterson, 1996, 2001; Schybergson, 2001). Also, the growth of average paper production has occurred especially within the largest companies, which can be clearly detected from Table 1.2. Table 1.1.

Year 1910 1950 1974 2000

Number of paper and pulp companies and domestic and foreign production units in population. Number off Number off companies Production units 4040 .. 3271 3372 2781 2900 1772 2103

Domestic Units

Units Abroad

.. 3341 2844 1907

.. 30 56 198

Sources: Database of Paper and Pulp companies of the world compiled by the authors. The database is available at: http://www.cc.jyu.fi/~jaojala/. More information about the data used in section “Data” below.

EVOLUTION OF COMPETITIVE STRATEGIES IN GLOBAL FORESTRY INDUSTRIESS Table 1.2.

9

Concentration of production: per cent share of paper production by top-10 and top-100 companies from the 1000 leading paper producers in 1950, 1974, and 2000.

1950 1974 2000

Top 10 26 16 24

Top 1000 67 60 72

Sources: See table 1.1.

However, if we look at the concentration on the global level, the picture is not as clear as in the case of Western economies. Already in the early 1950s the top ten paper companies produced one fourth of the combined production of the thousand leading firms (Table 1.2). This figure is equal to the situation in 2000. Furthermore, our data suggests that the paper industry somewhat fractured from the 1950s up to the mid-1970s, and then, concentrated again during the past couple of decades. Furthermore, the share of the top one hundred companies’ production from the top one thousand has also developed similarly. The forest industries have been on the long run one of the fastest growing lines of business. Whilst at the beginning of the 20th century below ten million tons of paper was produced, in 1950 the figure was already 43 million tons and in 1995 around 260 million tons. Pulp production has increased correspondingly (Diesen, 1998; Huolman, 1992). The increase in paper production is due to the growth of the companies. At the beginning of the 20th century a paper company produced on average around seven thousand tons of paper annually, whilst the number in 2000 was already 235 thousand tons. The growth is even faster, if we look only at the major producers (Figure 1.2). This evolution has been due to both organic growth and to mergers and acquisitions. The forest industries have been throughout the 20th century a mixture of big players that have even further concentrated, and a number of small and medium sized companies which have been important local actors. This can be also detected from the amount of internationalisation of production (Table 1.1): even in 2000 only around ten per cent of the companies had production units abroad. Still, the internationalisation has been rapid, since this percentage was below one in 1950 and around two in 1974. Internationalisation has been even concentrated in geographical domains: there has been only a limited amount of internationalisation e.g. between North America and Europe (Sajasalo, 2003).

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8000 7000 6000 5000 4000 3000 2000 1000 0 1950

1974

Top 10

2000

Top 100

All

Sources: See Table 1.1.

Figure 1.3. Average annual paper production in the top-10 and top-100 companies in 1950, 1974, and 2000, compared to average production in all companies in population (1000 tons).

Vertical integration is a typical feature in the forest industries (Huolman, 1995; Ohanian, 1994). In many cases sawmilling companies have moved forwards in the production chain and started to produce pulp, and later on also paper. Especially the number of companies producing only pulp has decreased significantly during the latter part of the 20th century. They have also moved the centre of production towards more valuable paper products. For example, in 2000 out of the whole population of 1772 firms only 75 were producing solely market pulp4, 93 out of 2782 in 1974, and 176 out of 3271 in 1950 (see also Table 1.3). Especially after the mid-1970s the average paper production grew more rapidly than the average pulp production (Figure 1.4). Also this indicates, first, the concentration on paper production, but also, secondly, the technological development in paper industries, namely, the diminishing need to use pulp as raw material. Table 1.3.

Type of production in company population, number of companies.

1910 1950 1974 2000

Paper production 3485 3089 2661 1677

Pulp production 311 543 419 416

Sources: See Table 1.1. 4

Though, there are a number of companies of which we do not know their type of production.

EVOLUTION OF COMPETITIVE STRATEGIES IN GLOBAL FORESTRY INDUSTRIESS

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250 200 150 100 50

1910 1950 Average p ap er p roduction

1974 2000 Average p ulp p roduction

Sources: Database compiled by the authors. Number off companies from which data is available: 1910: 881 (paper) and 123 (pulp); 1954: 1121 (paper) and 252 (pulp); 1974: 1673 (paper) and 302 (pulp); 2000: 1285 (paper) and 342 (pulp).

Figure 1.4. Average paper and pulp production per company in 1910, 1950, 1954, and 2000 (thousand tons/year).

Most of the studies dealing with the global forest industries concentrate on only the companies in Western Europe and North America (e.g. Boothman, 2000; Heinrich, 2001; Moen, 1998; Peterson, 1996; Sajasalo, 2003; Toivanen, 2004 – See also, however, e.g. Minami, 1977). The company population, however, suggests that a wider perspective is needed when dealing with this line of business (Table 1.4). Though the European and North-American companies are dominating, both in size and number, the paper and pulp production (Figure 1.1), especially the growth in Asia and Latin-America has been significant. Also, certain South-African t companies (such as Mondi International and Sappi) and Australasian companies (like Amcor and Carter Holt Harvey) have been among the leading forest industry firms both in terms of production output and turnover. In this anthology, again, we concentrate on only North American and Nordic – to be precisely Finnish and Swedish – companies. The rationale for this can be detected from Figure 1.1. The North-American, namely U.S. and Canadian, companies have dominated the paper and pulp industries throughout the 20thh century. However, during the last decades of the century the Nordic companies equalled their North American competitors – not only in terms of production, but also in productivity and profitability (Lamberg, 2005; Lamberg & Laurila, 2004; Lamberg & Ojala, 2005). Though, still in 1993 North American companies produced about 38 per cent of the world total paper and board production, whilst the Western European companies produced 26 per cent. However, especially Nordic producers concentrated on

12

JUHA-ANTTI LAMBERG AND JARI OJALA

products requiring a higher degree of processing (Diesen, 1998). Therefore, the key question in this volume is to find the explanations for this development. Table 1.4.

Geographic allocation of the companies in population. Europe

1950 1974 2000

2980 1971 1548 763

N North America 929 584 414 324

Asia Australasia 39 570 515 497

4 9 10 10

LatinAmerica 83 116 255 152

Africa 5 21 39 25

Sources: See Table 1.1.

2.1 Technology change The technology development within the paper industry can be roughly divided into: 1) products; 2) processes; 3) supportive areas/production (e.g. automation, chemistry); 4) other technological development (including corporate organisation). Traditionally, the development of products and the organisation have been the sphere of the forestry companies themselves, whereas the processes and supportive areas have been the domain of the machine and equipment producers (Airaksinen, 1988; Alajoutsijärvi, 1996; Jokinen & Heinonen, 1987). Paper industry technology has generally developed in small steps (Cohen, 1984; Landes, 1969; Laurila, 1998; Magee, 1997; Mokyr, 1990; Stier & Bengston, 1992). Excluding automation the amount of high tech equipment within the industry is fairly low – even the basic technological structures have not developed for decades. For example, the oldest paper machines in use in Finland in the early third millennium were over 100 years old. However, at the same time the size of the paper machines, as well as their production capacity, productivity, and efficiency have risen enormously. The maximum speed of the paper machines has increased from 200 meters per minute at the turn of the 20th century, to over 1800 meters per minute a century later. At the same time the maximum breadth of the machinery has grown from three meters to over nine meters (Airaksinen, 1988; Diesen, 1998; Huolman, 1992, 1995). Characteristics of the mature industries, such as the paper and pulp industry, are the scale advantages within the productivity and gross incomes gained through investments. There is, however, a divergence between different companies and production plants. As Lundberg (1972) has proved, in Swedish pulp industries the productivity within the “top” plants from the 1940s to 1960s was twice as much as it was within the “average” plants. Productivity growth within these plants was based on the technological advantages and to the larger size off the plants. Within the smaller plants the productivity growth was, according to him, more or less based on the structural changes in the national economy (Lundberg, 1972). Typical for the paper and pulp industries are huge investments in production technology. Thus, the production is typical of the manufacturing industry in which economies of scale is a decisive factor to be exact, the scale effects acquired by

EVOLUTION OF COMPETITIVE STRATEGIES IN GLOBAL FORESTRY INDUSTRIESS

13

production technology and by the concentration process. Both technology and concentration are closely interlinked with the decisions made by the companies in the past. Thus, the industry is highly path dependent: the companies chose their paths for decades to come within e.g. the technology decision processes (David, 1986, 2001; Dosi, 1997). This has both negative and positive side effects. On the one hand, it enables long term planning and commitment. On the other, “wrong” investments made in the past can harm the companies’ development for the future decades to come. There are a number off examples of both successful and unsuccessful investments. For example, in the case of the Schauman Corporation the over investments in the 1970s and 1980s led to the break up of the whole company (see: Ojala and Pajunen, in this volume). Investments within the paper and pulp industries have been growing in size all the time due to the expansion in size and capacity of the machinery. The maintenance and renewal investments of the machinery in use have grown in conjunction with the company’s growth. From the total post war investments within the four largest Finnish paper industry companies 53 per cent were made during the 1990s, though only a limited number of new machines or other production facilities were constructed during the last decade of the 20th century (Lamberg & Ojala, 2001; Vuori & Ylä-Anttila, 1992). Following the concentration process, also the number of machines per firm has grown – especially within the largest corporations (Table 1.5). In the case of all the companies in the population, the level of production per machine has grown around 20 fold from the beginning up until the end of the century and within the top one hundred companies the average annual production per machine has grown six-fold from the early 1950s up until the end of the century. Still, in the whole population of companies the typical company has only a couple of small machines. Also, the increased usage of recycled fibre has provedd to be disadvantageous to the traditional economies of scale in paper industries. Namely, the nearness of the raw material base in e.g. large cities has created a new concept called the “minimill” (Diesen, 1998; Turner & Deadman, 1983). Table 1.5.

Average number of paper machines, top o 10, top 100 and all companies in population.

1910 1950 1974 2000

Top 10 .. 19.6 32.7 38.7

Top 1000 .. 8.1 17.0 17.6

Alll 2.3 3.0 3.4 3.7

N 2859 2018 2078 1242

Due to the growth in machinery there has been a significant increase in productivity, both in terms of the volume and values produced by one worker, which can be detected from the case-analysis in this volume (see also Diesen, 1998). This is not related only to the growth of single machines, but also to the automation of the processes and to the rise of vertically integrated paper producing combines that include both pulp and paper production.

14

JUHA-ANTTI LAMBERG AND JARI OJALA

Besides the obvious technological development in paper machinery, however, also other technological changes have occurred during the 20th century, which in their part can explain the changes in the whole industry. Though a typical feature of the paper and pulp industry has been the rather gradual technological accumulation rather than major leaps (Cohen, 1984; Magee, 1997), still also certain major changes can be detected from the 20th century (Kettunen, 2002; Lorant, 1967; Toivanen, 2004). These changes include, for example, the change from sulphite to sulphate pulp, the introduction of machine coated paper grades, thermo and pressure mechanical pulp, and increased usage of recycled fibre (Diesen, 1998; Kettunen, 2002; Laurila, 1997, 1998; Toivanen, 2004). Furthermore, as in other industries, also a lot of organisational changes have taken place, including technological development, such as the introduction of computers and management information systems (e.g. SAP). Furthermore, also research and development has gained more importance in forest industry companies, though traditionally the share of research and development in the paper industries turnover has traditionally been quite low – in Finland the paper and pulp industry companies spent on average only 2.2 per cent of their turnover on research and development in 1989 (Vuori & Ylä-Anttila, 1992). This is largely related to the fact, especially in the Finnish case, that the processes and products are usually developed outside the firms, especially in the jointly owned Central Laboratory, Universities, and in companies producing production technology (Alajoutsijärvi, 1996; Hamberg, 1963; Michelsen, 1993). Though, on occasion, accusations have been made in Finland that the cooperation between the Central Laboratory and the research units within the individual companies are not as close as they should be.5 The forest industry is cyclical by nature due to the fluctuation in prices for end products and raw materials. Economic factors, growth of population, and level of industrial production have all had an impact on the forest industries on the whole and for the paper and pulp production in particular. Especially from the 1970s onwards, as Diesen suggests, additional factors such as development of office technology and advertising expenditures have shaped the limits of what is possible for the industries. More emphasis has been put on, for example, in the Nordic countries on office and coated magazine paper production. In 1995 around 45 per cent of paper consumption was used for communication (newsprint, printing, and writing papers, 40 per cent for packaging, and 15 per cent for miscellaneous (hygienic, health care etc.). There seems to be a strong correlation of GDP per capita and paper consumption, though the growth of the global paper consumption has exceeded the GDP growth since 1950 by a factor of 1 – 1.5 depending on time, period and region. Also sawn timber is highly vulnerable to the fluctuations because the demand correlates with the fluctuation within the construction industries (Diesen, 1998; Halme, 1955; Huolman, 1995). Thus, the ‘big picture’ of the industry seems to be rather clear including the incremental development in technology, strong correlation with the macro business 5

As did the strategy committee within the Kymmene Corporation during the early 1980s. KC, Minutes of the strategy committee 20th December 1983.

EVOLUTION OF COMPETITIVE STRATEGIES IN GLOBAL FORESTRY INDUSTRIESS

15

cycles and the typical demography of a mature industry. What remains interesting, however, are the development paths of the individual firms which have led to either surv r ival or death, success or failure. This creates the primary motivation for this book as a whole. 3 METHOD FOR THE BOOK6 3.1 Research Design The unifying methodological theme of the book is the qualitative case analyses and the comparisons between them. The case study approach has been defined as a method in qualitative research. However, it might be more appropriate to simply state that it is a relevant choice to analyse phenomena longitudinally in contrast to cross-sectional research designs (Stake, 2000). According to Yin’s original definition, a case study has a contemporary dimension and the triangulation (usually) includes interviews or observation among the use archival and documentary material. From this point of view, there is no such phenomenon as an “historical case study,” but case studies or histories (Yin, 1989). It is evident that this definition is problematic although the principle of triangulation, for example, is rather similar to the traditional critical assessment of sources in history (Bentley, 1999). The reason why the historical analyses in this book are defined as historical case studies is grounded on existing theoretical literature. In history, the primary method is inductive inquiry whereas in the cases of this book the research is both deductive and inductive (Pettigrew, 1997). Thus, using other popular definitions of case study method, the cases in this book can be defined as extended case studies, plausibility probes or even crucial cases. The extended case study “…deals with a sequence of events, sometimes over quite a long period…the processual aspect is given emphasis.” Plausibility probes are case studies used “…specifically to test interpretive paradigms which have been established either by previous case studies or by other procedures.” Crucial case studies give possibilities to create propositions or even to test them (Mitchell, 2000). The design of a case study can be either loose or tight depending on how much priori assumptions and pre-structuring is made (Miles & Huberman, 1994). In this book, the explicit conceptual frameworks and systematic methodology makes the approach pre-structured and tight. The rational for this choice is that in previous studies on the Finnish paper and pulp industry the design has been based on more heuristic descriptive aspects and visualization of strategic decision-making situations (Näsi, Lamberg, Ojala, & Sajasalo, 2001; Näsi, Ranta, & Sajasalo, 1998). Furthermore, in other Scandinavian studies analyzing the paper and pulp industry, more inductive methods have led to rather similar research results to those of the recent Finnish studies (Melander, 1997, 2005; Moen, 1998; Peterson, 1996, 2001).

6

Earlier version of the section was published in Juha-Antti Lamberg, Strategic Action and Path Dependence: Profiles and Archetypes of Competitive Behaviour in a Global Industry (2005).

16

JUHA-ANTTI LAMBERG AND JARI OJALA

Thus, it is expected that the tight approach improves both the validity and reliability of the study. 3.2 Firm Sample The main idea of the book is to compare forest industry firms originating from the U.S. and Scandinavia. As the Norwegian Norske Skog has been analyzed extensively in the recent literature (Moen, 1998; Sæther, 2004), we decided to concentrate on the U.S., Swedish and Finnish firms. In this group, U.S.-based firms represent the traditional hegemony in the industry. On the contrary, the Finnish and Swedish firms essentially were the most winners of the 1980—1990s. We followed two specific decision-making criteria when building the sample. First, we concentrate only on the originally (i.e. before 1970s) diversified business-tobusiness companies and thus omitted the business-to-consumer and specialized niche firms. Second, we included firms with different governance structures. Thus, our sample covers the largest diversified U.S., Finnish and Swedish firms but also more randomly sampled family firms. In making the decision of which family firms were chosen, the personal interests of the researchers and access to relevant data primarily dictated it. What needs to be emphasized is that many of the largest firms were originally family-owned. So the sampled family firms deviate from this group as they have retained their governance structure t throughout the period. Finally, some of the firms under scrutiny were acquired before the end of the 1990s. These firms represent a less successful group of forestt industry firms and should strengthen the validity of the sample. The firm sample is described in Table 1.6 and below. Table 1.6.

Company sample. 1999 1974 1999 Original Current Nationality Founding year turnover ranking ranking focus ownership (billions (paper (paper structure dollars) sales) sales)

International Paper Mead Weyerhauser Georgia Pacific Gulf States Paper Enso-Gutzeit (Stora-Enso) Kymmene UPM

US

1898

25

1.

1. Paper

Public

US US US

1881 1900 1927

3.8 12.2 20

8. 4. 5.

US

1884

0.5

..

.. Paper

Private

FIN

1918

11

32.

2. Timber

Public

FIN

1904

..

56.

.. Paper

FIN

1920

8.8

53.

5. Paper

Public (acquired by UPM) Public

17. Paper Public 12. Lumber Public 10. Lumber Public

Table 1.6 (cont.)

EVOLUTION OF COMPETITIVE STRATEGIES IN GLOBAL FORESTRY INDUSTRIESS

17

Table 1.6 (cont.)

Metsäliitto Ahlström Schauman

Nationality Founding 1999 1974 1999 Original Current year turnover ranking ranking focus ownership (billions (paper (paper structure dollars) sales) sales) FIN 1934 4.5 93. 13. Lumber Co-operative FIN 1851 2.7 58. 54. Timber Private FIN 1883 .. 94. .. Timber, Private (acquired Plywood by Kymmene)

SCA

Sweden

1920s

9.1

28.

10. Pulp

Public

MoDo

Sweden

1872

2.1

43.

25. Timber

Private

3.2.1 International Paper International Paper was founded in 1898. Being originally a newsprint producer, it currently has significant global businesses in paper and paper distribution, packaging and forest products, including building materials. The company has operations in nearly 40 countries and employs approximately 83,000 people worldwide and exports its products to more than 120 nations. In terms of overall sales, International Paper remains the world’s largest forest industry company. (www.internationalpaper.com). 3.2.2 Mead Mead’s roots trace back to the year 1846 as the Ellis, Chaflin and Company was founded in Ohio. In 1904 banks had to step in, but the company was incorporated again in 1905 as the Mead Pulp and Paper Company. In 2002 Mead merged with Westvaco thus creating the MeadWestvaco Corporation (www.meadwestvaco.com). In 2000 Mead had 15,000 employees and net sales of 4.7 billion dollars. Mead was a public company primarily engaged with production of coated and uncoated papers and specialties, office products, coated kraft board and multiple packaging systems for bottlers. In its history, the company also produced pulp, lumber, corrugated packaging, data services, and was involved in foundry and rubber businesses and many kinds of distribution 3.2.3 Weyerhaeuser Weyerhaeuser (www.weyerhaeuser.com) is a public company and at the end of 2004 it had 53,600 employees. In 2003 it had net sales of 19.9 billion dollars, and so it was the 5th largest American pulp and paper company. Weyerhaeuser was founded in 1900 in the State of Washington as the Weyerhaeuser Timber Company and initially it was primarily engaged in land d ownership. Currently, Weyerhaeuser’s businesses include growing and harvesting of timber, wood products manufacturing and distribution, pulp, paper, containerboard and packaging production, and real estate development and construction.

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JUHA-ANTTI LAMBERG AND JARI OJALA

3.2.4 Georgia Pacific Georgia-Pacific (www.gp.com) is a public company, and in December 2004 it employed approximately 55,000 people in North America and Europe. In 2003 the company had net sales of 20.3 billion dollars, which made it the second largest American pulp and paper company. The company was founded in 1927 in Georgia as the Georgia Hardwood Lumber Company, and started as a wholesale lumber yard. Today, Georgia-Pacific produces tissue, disposable tabletop products, pulp, paper, packaging, building products and related chemicals. 3.2.5 Gulf States Paper Corporation Gulf States Paper Corporation is a privately held company that currently employs more than 2,900 employees in 10 U.S.-states. The company is the third largest supplier of SBS folding boxboard and one of the top 10 folding carton manufacturers (www.company.monster.com/gsp) in the U.S. In 1998, the company’s annual revenues were approximately $500 million. Founded in 1884, the company has experienced slow but steady growth over its nearly one hundred and twenty years of existence. The company currently consists of five distinct operating divisions: 1) Natural Resources, 2) Wood Products, 3) Pulp & Paperboard, 4) Paperboard Packaging, and 5) Business Solutions. 3.2.6 Enso-Gutzeit (Stora-Enso) Enso-Gutzeit originates to the sawmill founded by the Norwegian Gutzeit family in 1872. It was acquired by the state of Finland in 1919 and merged with Swedish Stora Kopparbergs Bergslags Aktiebolag (STORA) in 1998. Stora Enso (www.storaenso.com) is an integrated paper, packaging and forest products company producing publication and fine papers, packaging boards and wood and products. In 2005, Stora Enso has over 45 000 employees in more than 40 countries on five continents. Stora Enso’s shares are listed in Helsinki, Stockholm and New York. 3.2.7 Kymmene Kymmene Corporation was for a long time the largest, private industrial enterprise in Finland and during the early 20th century y the largest paper producer in the Nordic countries. Kymmene, founded in 1904, concentrated on, unlike the other Finnish forest industry companies during the early part of the 20th century, mainly paper production, and not on other related production. However, during the latter part of the century the company diversified rapidly and into unrelated areas. It owned e.g. metal industries, petro-chemistry and finally, was merged in the early 1980s with Strömberg as a conglomerate with two dominant industrial branches: metal (mainly electric and machinery) and forest industries. This merger was a failure, and soon the corporation was turned around and it concentrated again on the core competencies, namely, paper and pulp production. The early 1990s deperession hit

EVOLUTION OF COMPETITIVE STRATEGIES IN GLOBAL FORESTRY INDUSTRIESS

19

the company’s main businesses hard. In 1995 Kymmene was merged with UPM as UPM-Kymmene. 3.2.8 UPM United Paper Mills was founded in 1920 by merging together three rather small paper producing companies. UPM was, thus, right from the beginning a paper producing firm, unlike many other Finnish paper producers which had integrated their production from sawmills or pulp to paper during the 20th century. Especially with extensive investment in new production facilities UPM grew to be a major player in Finnish forest industries by the mid-20th century. Through the mergers and acquisitions, first in its homeland, and second internationally, UPM became one of the leading companies in international forest industries during the 1990s. 3.2.9 Metsäliitto Metsäliitto was founded in 1934 to represent the interests of the forest owners in the lumber market of Finland. After the Second World War Metsäliitto was re-organized as a cooperative. Simultaneously, it started to expand into timber trade and pulp production. Currently, the Metsäliitto corporation is a diversified conglomerate. The independent companies partly owned by Metsäliitto operate in the paper and pulp industry, sawn timber and raw material markets. Metsäliitto has concentrated on European markets yet also has activities in North America and South America. Metsäliitto has over 30,000 employees. 3.2.10 Ahlstrom With net sales over two billion and almost 10,000 employees, Ahlstrom was ranked among the top 25 Finnish firms in 2000 (http://www.ahlstrom.com). Founded in 1851, Ahlstrom has long been one of the largest industrial corporations in Finland. Ahlstrom’s first paper mill was founded in 1907 (Kauttua) and its first pulp mill in 1917 (Varkaus). Though the company has diversified into several sectors, it has mainly operated within the wood-processing cluster. Today the company is a leader in high performance fiber based materials serving niche markets worldwide. At the moment, the company is going through a profound structural change: the company was split into three parts in June 2001. According to the strategic plan of Ahlstrom Corporation, the ownership share of the family members will be diminished over the next several years. 3.2.11 Schauman The Finnish pulp and paper producing company Schauman ceased to exist in 1987 when it was merged with Kymmene Corporation. Today, the production plants of Schauman are part of the UPM-Kymmene Corporation, one of leading paper producers in the world. During its last operating year (1987), Schauman’s net sales

20

JUHA-ANTTI LAMBERG AND JARI OJALA

were approximately 500 million euros and the company had 7,000 employees. Schauman, founded in 1883, concentrated during the early 20th century on saw milling and plywood production. It entered the pulp industry in the 1930’s and paper production in the 1960’s. The company went through a structural change in the 1970’s, becoming one of the most essential (market) pulp producers in Finland. The pulp production capacity of Schauman in 1985 was the third largest in Finland composing approximately ten percent of the total. 3.2.12 SCA SCA is a public company currently employing approximately 40,000 employees in more than 40 countries (www.SCA.com). SCA was founded in the late 1920’s as an attempt to build a monopoly in the pulp industry. The famous match monopolist Ivan Kreuger was not able to carry the project through and following his death and the Second World War, it was not until the early 1950’s before SCA was operating as one united company. In 2001, the annual revenues were SEK 82 billion (approx. 8 Billion USD). SCA produces and sells absorbent hygiene products (49% of sales), packaging solutions (35%) and publication papers (14%). The company has its headquarters in Stockholm, Sweden. 3.2.13 MoDo MoDo was founded in 1872 by the Kempe family. The company, although publicly listed, was controlled by the same family until 1990. As a result of a takeover attempt, the family was forced to sell their majority share of the company in 1990. At that time, the company’s major operations were sawn timber, office paper, newspaper, pulp and folded cardboard. Att the end of 1990, the company’s core business was merged with SCA’s office paper and a reborn company, MoDo Paper, went public. MoDo Paper was at that time focusing on pulp and office paper. In 2001, MoDo Paper was merged with M-Real, a company controlled by the forest owners cooperative in Finland. 3.3 Research Strategy The methodological idea in the study is to analyse strategy processes using qualitative data: reports, correspondence, published material and literature. Our research strategy is to exploit multiple strategies from Langley’s (1999) set of different research approaches. Furthermore, we use descriptive quantitative analysis to complement the process analysis. Thus, we engaged in intensive methodological triangulation in order to enhance the validity of our interpretations.

EVOLUTION OF COMPETITIVE STRATEGIES IN GLOBAL FORESTRY INDUSTRIESS Table 1.7.

Research strategies and their purpose for the study.

Research Data Strategy Historical Event Analysis (Langley, 1999)

Level of Method Simplicity Low Construction of detailed story from the raw data.

Quantification Event (of process data) (Langley, 1999)

High

Quantitative analysis

21

Financial High

Purpose(s) for the study

1) To include contextual element in the strategy analysis; 2) to help to understand intraorganizational decision-making processes; 3) to include individual actors in the analysis. Systematic listing 1) To facilitate interand codification of organizational comparisons; qualitative incidents 2) to clarify organizational according to strategy paths. predetermined characteristics. Descriptive statistical 1) to facilitate comparisons; time-series analysis 2) to anchor strategic patterns to of crucial economic economic realities; variables. 3) to include the totality of strategic actions in the analysis (indirectly via investment data).

3.4 Historical analysis Historical analysis is the starting point for all cases. The aim is to include contextual factors in the analysis through realistic description (Chandler & Salsbury, 1971; Chandler, 1962; Pettigrew, 1985). According to Collingwood’s (1956) classic definition, history is re-enactment of past thought in the researcher’s own mind. Furthermore, he divides the past into the inside and outside of events. Hence, for example a merger in the paper industry is the outside of that event: finding that the merger has happened. The inside of the event has happened only in the actors’ thoughts. Together, outside and inside of an event constitute an action that is the unity of events. The researcher’s duty is to think him into this action: “to discern the thoughts of its agent.”(Collingwood, 1956) The basic method of traditional historical analysis has been to describe the outside of the events and to try to understand the motives of the actors’ through exploration and continuous reading of archived texts (Bentley, 1999). Historical narrative as a “perceived sequence of non-randomly connected events” is the most convenient style of expression for this kind of analysis (Roth, 1995; White, 1987). For this study historical description and interpretation is an essential part of the methodological set because it helps us to understand the motivations, i.e. the inside events, of organizational actors.

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JUHA-ANTTI LAMBERG AND JARI OJALA

3.5 Strategic events analysis: method to codify process data The second part in the methodological tool-set is a systematic codifying model that gives the possibility to systematically analyse and compare historical strategies. From Langley’s (1999) research strategies, it can be defined as a quantification strategy. From the theoretical point of view, event data analysis is an operationalisation method for the path dependence argument giving possibilities to evaluate causal relations between historical events. Quantification strategies have been widely used in event data analysis in organization studies (Hannan & Carroll, 1981; Hannan & Tuma, 1979; Hannnan & Carroll, 1981; Tuma & Hannan, 1979), political science (Rummel, 1979), and during the 1980—1990s in strategy research as well (Miller & Chen, 1994; K. Smith et al., 2001). The bases for all quantification-based analysis are historical events that are arranged according their sequences. This chronological set of events can be coded by using a set of dichotomous variables. The idea in coded event data is that it can be analysed by using different quantitative methods, and that these systematic event series can be used in comparative studies (Van de Ven, 1990; Van de Ven & Poole, 1995). An event can be defined as consisting “of some qualitative change that occurs at [a] specific point in time … [furthermore] ... change must consist of a relatively sharp disjunction between what precedes and what follows” (Allison, 1984). The most efficient way to study events is to collect event history data and create a longitudinal record of when events happened to (in this case) firms. Hence, the essential concept in the strategic action analysis is a strategic action (Grimm & Smith, 1997) crucial strategic decision or change that has influenced the historical development of the company. A starting point for the analysis is the definition of a strategic action. We follow Miller who has defined strategic actions as “... [including] major facilities expansions, mergers and acquisitions, strategic alliances, and important new products or services [...] strategic actions involve a larger expenditure of resources, a longer time horizon, and a greater departure from the status qquo than do tactical actions” (Miller & Chen, 1994). Therefore, the importance of an action can be evaluated by first, its economic importance (from resource allocation perspective), secondly by its innovative dimension and thirdly and most importantly, by its network effect (Eriksson et al., 2000). Following the aforementioned guidelines, the case-specific databases are focused on strategic actions. It is important to emphasize m that strategic does not necessarily mean large only in financial terms. For example, a small event that started the historical diversification process in the 1920s might from the perspective of this study, be far more important than a new paper mill in the 1990s (See examples e.g. in Lamberg, 2001b; Ojala, 2001a). In addition, the emphasis is both on opening and closing actions. Hence, for example renovations of paper mills are rarely considered as strategic actions. This is also a major difference in comparison to the majority of earlier studies in competitive dynamics, which have concentrated primarily on opening actions (Dranikoff, Koller, & Schneider, 2002; Ferrier, 2001; Hambrick et al., 1996; Näsi, 1996).

EVOLUTION OF COMPETITIVE STRATEGIES IN GLOBAL FORESTRY INDUSTRIESS

23

Our action database consisted of 2620 company-specific strategic actions. Table 1.8 shows the number of actions per each decade. In our database the post war period is stressed, consisting of over 80 per cent of strategic actions. Thus, the period from the mid-19th century up to the end of the Second World War can be understood as a background to the analysis, which is more concentrated on the more contemporary period. This is also the case with the financial analysis, since we do have accurate data basically only from the 1950s onwards.

Table 1.8.

Number of actions per decade, all case companies. Years Number of actions 1846-1944 424 1945-1959 320 1960-1969 532 1970-1979 398 1980-1989 424 1990-1999 396 2000-2003 126 1846-2003 2620

Per cent share 16 12 20 15 16 15 5 100

Sources: The database available at: http://www.cc.jyu.fi/~jaojala/.

In the coding, we followed Lamberg, Laurila and Nokelainen (Appendix) who coded forest industry actions according to a four dimensional coding framework. The first dimension is industry invariant showing the general nature of each action. The second dimension is industry-specific focusing on specific actions on the product and resource market. The third dimension defines if the actions were conducted alone or with other organizations and finally, the fourth dimension deals with the geographical focus of the actions. Appendix includes the detailed coding manual. Table 1.9 lists the used categories and aggregate categories regarding the resource and product market dimension.

24 Table 1.9.

JUHA-ANTTI LAMBERG AND JARI OJALA The Coding Manual.

The general nature of action Buying / Acquisition

Build/expand/refurbish Selling / divestment

Closing of a unit / divestment

Resource / product market 1. Raw materials (wood; recycled fiber materials)

2. Sawn timber and wood products (furnitures; doors etc.) 3. Pulp (chemical and mechanic) 4. Paper 5. Cardboard and containerboard production

6. Sheet products

7. Packaging and converting

8. Selling and distribution

Explanation A company acquires a production unit, forest land, another company or similar orr increases its ownership in it. A company builds a new production unit, another unit or similar or expands or refurbishes it. A company sells a part of its operations to another company or other entity or decreases its ownership in another entity. A company closes its production unit, other unit or similar so, that it is not transferred into ownership of another company or other entity. A company can acquire new wood resources primarily by acquiring forestland or plantations. Similarly, a company can expand its current wood resources via new planting on existing forestland. Sawn timber and wood products encompass here also products with a higher degree of processing such as furniture and other joineries. Pulp or cellulose refers to mass which is produced chemically or mechanically. Paper refers to all paper a production such as printing paper, fine paper and tissue. By cardboard and containerboard are referred to all such products which are not processed into ready packages and containers. The principal difference with paper production is the higher “thickness” of the product. Sheet products refer to all wood-based sheet products that are used primarily for building purposes such as hardboard and plywood board. Packaging products refers to all packaging products that are based on refining cardboard and containerboard. Converting products, in turn, refer to products that combine paper and differentt synthetic coatings and adhesives such as stickers, decals, notebooks and wallpapers. Selling and distribution is concerned with actions related to sales offices, sales companies, distribution yards and distribution companies. Also marketing-related activities generally fall under this category. Table 1.9 (cont.)

EVOLUTION OF COMPETITIVE STRATEGIES IN GLOBAL FORESTRY INDUSTRIESS

25

Table 1.9 (cont.)

The general nature of action 9. Other related activities

10. Several activities 11. Unrelated activities (diversification) Level of co-operation Action conducted alone Action conducted in co-operation Geographic focus International

Domestic

Explanation Other related activity refers to all other actions that are concerned with wood processing but that do not fall under any of the preceding categories (1…8) such as research and development. Several activities refers to actions that concern several of the business areas defined above simultaneously. Unrelated actions refer to such actions that are not concerned with any of the business areas defined above. An action is conducted alone. An action is conducted in co-operation (joint-venture; alliance) with another company or other entity. An action contains an international expansion if the action takes place in or is targeted at another country than the home country of the company. An action contains a domestic expansion if the action takes place in the home country of the company.

Source: Appendix.

The coding process was conducted by each individual researcher / research team alone and verified by the editors. 3.6 Analysis of economic performance The problem as well as benefit in traditional historical methods is the richness of information. Economic performance analysis, on the contrary, simplifies history but helps us to find the relevant structures and to anchor the strategic patterns to the fact-based development of the companies (Langley, 1999; Melin, 1990; Van de Ven, 1990). Also, economic data facilitates inter-organizational comparisons and reflects changes in the competitive environment. And after all, strategy essentially is about the relationship between activity and performance. The difficulties in comparing economic performance of companies coming from different accounting systems are discussed comprehensively in the accounting literature (Blaine, 1993). In this study, we use seven indicators of economic performance. These indicators are calculated using standard calculation formulas. The figures can be estimated as being rather reliable taking into account similar results in other, more specialized studies. (Artto, 1995b) The indicators used in this study are defined in Table 1.10.

26

JUHA-ANTTI LAMBERG AND JARI OJALA

Table 1.10. Economic Indicators. Indicator Turnover (net sales) Assets and liabilities Investments Operating profit Capital turnover ROI Productivity

Purpose Formula To measure the scale of production To measure economic resources (slack) To measure strategic patterns in monetary terms To measure short time profitability D-E+F+G-H+I –K To measure the capital effectiveness of the company A/B To measure the profitability from shareholder L +H+K/A perspective To measure the productivity in terms of production B / C per employees.

Abbreviations: A=The sum of balance board; B=Turnover (net sales); C=Employees; D=Operating margin before depreciation; E=Depreciations (-) sign; F=Dividend income; G=Financial income; H=Interest expenses; I=Difference in exchange rates (realized and unrealized); K=Taxes (direct); L=Operating profit.

All figures are presented in constant values and in 2003 dollars. The deflation is based on domestic consumer price indexes, and the currency transformation from Finnish markkas, Swedes Krones and Euros has been made according to its 2003 value against the U.S. dollar. 3.7 Data The material for the analysis is a combination of archival material including industry statistics and calendars as well as Annual Reports. During the research process, the individual researchers engaged in intensive utilization of various non-public as well as public archival materials in the cases off the particular firms. In most cases, the researchers started their data collection by y examining a variety of public sources such as company histories and magazine articles describing the historical development of the companies. Simultaneously, they studied the economic and political history of the forest industry to obtain knowledge of societal level development. Second, the researchers collected Annual Reports and relevant trade statistics. This material was used both for historical understanding of the companies’ histories and for identification of the strategic actions. Third, the researchers engaged in an extensive examination of non-public archival material focusing on strategic level issues at the corporate level. This material includes protocols, correspondence, consult reports, financial and other data linked to strategic management of the companies. Altogether, individual researchers analyzed thousands of documents. Moreover, for the comparative parts of the book we collected demographic data that illustrates the overall structural change of the industry. Each case analysis includes the specific descriptions of the used data. The types of documents and their function in the analysis are listed in Table 1.11.7: 7

Also additional archival material was used, e.g. the archives of the Finnish Forest Industry Federation (Helsinki) and Archives of Tampella Corporation (at ELKA, Mikkeli).

EVOLUTION OF COMPETITIVE STRATEGIES IN GLOBAL FORESTRY INDUSTRIESS

27

Table 1.11. Research material. Company / Material

Published and unpublished statistics

Newspapers and magazines

IP E-G Mead Weyerhauser GP Kymmene UPM Metsäliitto SCA MoDo Schauman Ahlström Gulf Used in:

X X X X X X X X X X X X X Financial analysis

X X X X X X X X X X X X X Narrative

Published company Archival material (correspondence, material (annual reports, calendars) research reports, minutes etc.) X X X X X X X X X X X X X X X X X Quantification, Narrative narrative

The company data including all paper and pulp industry firms in 1910, 1950, 1974, and 2000 and presented in the tables and figures in the introduction and in comparisons is based on a database compiled by the authors of introduction, and available at: http://www.cc.jyu.fi/~jaojala/. The main sources for the database have been Phillips’ Paper Trade Directories of The World, Paper and Pulp International – magazine, Annul reports of the individual firms, and the Moody’s Industrial manual. The data consists of over 4000 individual firms throughout the world. Due to the variety of sources used there is some shortcomings with the data. First, the data in Phillips’ Paper Trade directories (1910, 1950, 1974, and 2000) as well as in the Paper and Pulp International – magazine is based on the questionnaires sent to the companies. Thus, it is up to the companies whether they have completed the questionnaires properly. By comparing these two data sources we found a number of shortcomings in both – even important companies were missing or had wrong information especially with regards to production. Therefore, though Phillips’ directories are used as the primary source, the production figures for the top one hundred companies in 1974 and the top 150 companies in 2000 are collected from the Paper and Pulp International – magazine (for 2000 the production figures from 1999 were used). Furthermore, for 1974 data from Phillips’ directory from 1971 is also used. Second, the data is more or less comprehensive when dealing with NorthAmerica or Western Europe, but has serious shortcomings with regards to Asia (especially China, which is totally missing from 1974) and Eastern European Countries (e.g. the information from the Soviet Union/Russia are far from perfect and are missing as well from 1974). Thirdly, the concentration in paper industries is only roughly detected in the sources. E.g. Phillips’ Paper Trade directory from 2000

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JUHA-ANTTI LAMBERG AND JARI OJALA

has dealt the separate units of the largest multinational producers in different countries as individual companies, which makes the data rather difficult to handle. Fourthly, data includes different production units and lienear measures. Threfore, all measure figures were unified so that tonnages are used as production units and metrics as linear measures. The production figures are transformed to annual figures (in the sources per day, week, and month production are also used). Due to the problems listed above, the data is rechecked several times to avoid possible mistakes. However, it is possible that some mistakes still remain. We therefore sincerely hope that the readers visit our website and mail us about the possible problems in order to fix the database in the proper manner. (About the sources see: Kalish, 1975; Phillips, 1910, 1950, 1971, 1974, 2000; Rhiannon, Fortemps, & Galasso, 2000, Moody’s Industrial Manual 1910, 1950, and 1975) 3.8 A priori templates In the event data analysis, the chronological sequencing of events is the basis for all further investigations. In this study, events have been codified as discrete data according to their annual appearance (Allison, 1984). Besides this, all events have been divided into different a priori periods of analysis. The time periods for analysis are: Period Years (tolerantly) Characteristic feature

1. 2.

1900—1945 1946—1960

3. 4.

1961—1980 1981—1999

Two World Wars, accumulating protectionism. New technological innovations (sulphate), liberalization of trade in 1950s. Period of intensive (unrelated) diversification. Focusing, centralization, globalization.

Van de Ven, building on Poole, has warned that a priori staging in the early phases of data collection can create self-fulfilling prophesies (Van de Ven, 1992). The phases in this study are derived from earlier empirical studies on the paper and pulp industry, in which the staging was based on empirical evidence rather than an a priori decision (Lamberg, 2001a, 2001b; Lamberg & Ojala, 2001; Ojala, 2001a, k is minimized and 2001b). Thus, we can estimate that the self-fulfilling prophecy risk that it does not affect the interpretation of the research results. 4 STRUCTURE OF THE BOOK The book is divided into four parts. The first part includes this introduction, following the second part which presents the case studies in a specific order. Cases of the market leaders, International Paper and Enso-Gutzeit (Stora-Enso), analysed by Juha-Antti Lamberg, initiate our journey. Lamberg concludes that in both cases the strategic behaviour was strongly path dependent in nature and also the sequence of strategy logic was seemingly similar in both companies. In the following chapters, other large U.S. and Nordic companies are analysed d in a comparative

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29

manner. The U.S. firms, examined by Annaa Ahola, include Georgia-Pacific, Mead, and Weyerhaeuser, whilst the Finnish firms, studied by Jari Ojala and Juha-Antti Lamberg, include Kymmene, United Paper Mills (UPM), and Metsäliitto. One can find similar patterns both in U.S. and Finnish companies’ development despite the differences in the institutional and competitive environments. As Ahola concludes, the U.S. companies had similar financial opportunities and did not openly compete with one another. Among the most striking differences between the companies is the fact that for the Nordic companies the markets were abroad, while the U.S. based companies produced mainly for the domestic purposes. The Finnish story fits fairly well also for the the two Swedish companies, namely SCA and MoDo, which are analyzed here in comparative manner by Anders Melander. Melander addresses the competitive, institutional, and intraorgananisational forces that affected the possibilities the companies had. These include, for example, technological development that forced most of the actors to initiate integration projects, group pressure from the industries that directed the actions taken by the case companies, and finally, the ownership and financial structures that affected the firm behaviour. Melander also further proves that there were only a limited number of major strategic changes that took place during the time period. After the analysis of the largest U.S., Finnish, and Swedish companies the book offers chapters focusing on family-owned firms, starting with a comparative analysis of Ahlström and Schauman carried out by Jari Ojala and Kalle Pajunen, following a study of Gulf States Paper by Patrick Kreiser. Ojala and Pajunen conclude that the era of family-owned enterprises in the forestry industry is over, at least in the case of large-scale companies. This can clearly be detected from the story of the two analysed firms. This line of thought is further emphasised by Kreiser in his detailed study of Gulf States Paper, in which he demonstrates that this particular family firm avoided risks, was rather reactive than proactive, and was not particular innovative in its actions. Thus, it can not be characterised as an “entrepreneurial organisation”, though it moved to this direction over the last decades. The third part of the volume offers cognitive and game oriented explanations for the evolution of the forestry industry. Firstly, Pasi Sajasalo approaches the meaning of information and cognition in industry evolution, and secondly, Juha Näsi and Pasi Sajasalo the underpinning motivations of organizational actors to compete in the context of the forest industries. The fourth and last part of the book is devoted to comparisons and discussions. In this section, Ojala, Lamberg, Ahola, and Melander offer a comparative account of the strategy evolution and conclude the book by noting how emphemeral the market success has been. They demonstrate that the competitive nature of the industry has changed considerably little over the last century. The industry still shows national differences in behaviour although the next dominant organisational form may be a multinational forestry industry company.

CHAPTER 2

THE GIANT: INTERNATIONAL PAPER 1898—20001 JUHA-ANTTI LAMBERG Helsinki University of Technology e-mail: [email protected]

1 INTRODUCTION The United States is a unique case in the world’s modern economic history. As demonstrated in various fields of economic activity, it has been a benchmark nation since the late 19thh century (Madison, 1995). Huge domestic markets, a common language and a business-friendly institutional environment, among other factors, have created a fruitful context for industrial activities (Chandler, 1990; North, 1990, 1981). International Paper, in many respects, is a classic example of a big North American company: a giant. International Paper is a product of the American economic system before antitrust legislation. At the end of the 19th century, companies in different industries and practically in all industrialized countries t faced intensifying competition as a consequence of fast overall technological and economic development during the 1860—1880s (Chandler, 1990). In industries like paper and pulp, the fastest and easiest way to react to growing competition was to compete with lower prices and to try simultaneously to reduce production costs. As posited in the introductory part, the dependency on raw materials and shared technological information have traditionally emphasized the importance of cost effectiveness and economics of scale in the P&P industry. In essence, prices were the most flexible variable in the competitive system of the late 19th century. In Western Europe, the strategic response to intense competition was to create cartels, which in many occasions were able to stabilize prices, and sometimes production (Nussbaum, 1982; Schröter, 1996). Especially, in Germany and Scandinavian countries cartels were widely accepted in business as well as in the

1

Earlier version of this chapter was published in Juha-Antti Lamberg, Strategic Action and Path Dependence: Profiles and Archetypes of Competitive Behaviour in a Global Industry (2005).

31 Juha-Antti Lamberg, Juha Näsi, Jari Ojala, and Pasi Sajasalo (eds.), The Evolution of Competitive Strategies in Global Forestry t Industries: Comparative Perspectives, 31–44. © 2006 Springer. Printed in the Netherlands.

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public sector.2 The positive attitude of national governments was important for the maintenance of cartel agreements, since they could be legally enforced (Pohl, 1985). In the United States, cartel agreements had no legal status, and thus contracting parties were able to behave opportunistically against the agreements. In a sense, free-rider problems motivated companies rather to merge and to try to create monopolistic positions than to stabilize prices via cartels (Chandler, 1977; Lamoreaux, 1980; Olson, 1965). According to Chandler (1990), three merger waves occurred in United States between the 1880s and Sherman’s antitrust legislation in the early 20th century. The first mergers occurred in the 1880s before the 1889 New Jersey legislation. This juridical decision permitted companies to hold shares of stocks of other companies in any state. The second wave of mergers started with the passage of the New Jersey general incorporation laws and ended around 1893 when the global economic depression began to influence industries. The last merger wave materialized just before the Sherman Act and the antitrust movement in general. The formation of International Paper was part of the last merger phase (Lamoreaux, 1980; Livermore, 1935). In 1898, 17 paper and pulp mills operating in the Northeastern part of the United States merged to form International Paper. The mills included for example Hudson River Mill in Corinth, New York and the Lake George Paper Company mill at Ticonderoga, New York. The holdings of the new company included almost a million hectares of timberland in the northeastern states, and in Canada.3 The most important result of the merger was almost a 70 per cent market share in newsprint production (Guthrie, 1946). Thus, the first comers in technological sense of the 1860—1880s, had created an organization that in theory had the capacity to control the newsprint markets in the United States. For various reasons International Paper lost its nearly monopolistic position relatively soon. In 1913 it sold 26 per cent of the newsprint in the United States, and in 1938 its market share was under 20 per cent (Guthrie, 1946). International Paper was unable to hold its dominant position in the growing markets of the 1910— 1930s, although it was able to maintain itself as an industry leader. For example, in 2

3

Overview of European cartel systems in Schröterr (1996), “Cartelization and decartelization in Europe, 1870-1995: Rise and decline of an economic institution.” An Illustrative example of the Scandinavian system is described in Riitta Hjerppe, Suurimmat yritykset Suomen teollisuudessa 1844–1975, Bidrag till kännedom av Finlands natur och folk 123 (Helsinki, 1979); Hjerppe & Lamberg (2002), Economic Change in Finland after Russian rule; M. Kuisma (1993a), “Governmentt Action, Cartels and National Corporations – The Development Strategy of a Small Peripheral Nation during the Period of Crisis and Economic Disintegration in Europe (Finland 1918-1938)”, Scandinavian Economic History Review (3); Juha-Antti Lamberg, “Economic Interest Groups in the Finnish Foreign Trade Policy Decision-Making in the Early Independence Years,” Scandinavian Economic History Review (1998), Juha-Antti Lamberg, Taloudelliset eturyhmät neuvotteluprosesseissa. Suomen kauppasopimuspolitiikka 1920-1930-luvulla = (Economic Interest Groups in Negotiation Processes. Finnish Trade Agreement Policy in the 1920s and 1930s), Bidrag till kännedom av Finlands natur och folk 154. (Helsinki, 1999), Juha-Antti Lamberg and Mika Skippari, “Endogenous and Exogenous Variables in Trade Agreement Policy: Finnish Trade Agreement Policy in 19301960s,” Scandinavian Economic History Review 3 (2001). International Paper Company After Fifty Years, (United States, 1948), Short History of International Paper [Internet] (International Paper, 2001 [cited 12/21/01 2001]); available from www.internationalpaper.com/centennial.

INTERNATIONAL PAPER 1898—2000

33

the 1920—1930s it still had a price leadership position, and thus it was able to stabilize price fluctuations with its own market power (Haney, 1919). In the late 1990s, International Paper was still the biggest player in the paper and paperboard industry, not only in the United States, but globally as well. Its sales were almost twice of its challengers; it maintained a 10—15 per cent market share in various paper grades and operated in nearly 50 countries.4 The purpose of this chapter is to describe and analyse International Paper’s strategic development path during the 20th century using those methodological and conceptual perspectives described in the introductory part. In many ways, International Paper is a complicated company to analyse strategically in a limited space. This is especially evident in the contextual sense — both intra- and interorganizationally. A basic assumption is that International Paper represents a typical Dow Jones industrial firm, being publicly owned, controlled by the board of directors and d managed by y professi f onal managers. This said, th t e analysis of International Paper is more organization-centric than in the case of Enso, the emphasis being on the strategic actions. Table 2.1 shows the number and frequency of strategic action per period. Table 2.1.

International Paper: a Number of Actions per Period, average annual number of actions (actions/year in a period), and the share of joint ventures per period. Years

Period 1 Period 2 Period 3 Period 4 Total

1898-1945 1946-1960 1961-1980 1981-2000 1998-2000

Number of actions 70 46 94 76 286

Actions/year 1.5 3.3 4.9 4.0 2.8

Share of joint ventures 3 2 1 7 3

Joint ventures 2 1 1 5 9

The chapter is divided into five parts. After this introductory part, IP’s historical development will be analysed from the perspective of the focus and volume of production, including a description of IP’s strategic position geographically. The third part deals with IP’s financial performance from the longitudinal perspective, and the fourth part describes the company’s strategic action behaviour. In the last and concluding part, the strategic actions will be visualized using the strategy river approach introduced earlier. 2 VERTICAL INTEGRATOR At the beginning of the 20th century, IP concentrated almost entirely on producing newsprint. The old management of the merged mills continued in the new company, and it has been stated that they continued to manage the company in a most conservative way ((International Paper Company, 1948). From the theoretical point of view, it seems evident that International was simply suffering from the normal 4

Paperloop, Regional Information Centers.

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JUHA-ANTTI LAMBERG

post-merger symptoms, including cultural conflicts and difficulties in finding a shared strategic direction (Cartwright & Cooper, 1993; Walsh, 1988). IP faced a serious environmental change in 1913 when the import tariff against Canadian newspaper was eliminated (Southworth, 1922). The production costs in Canada were lower than in the United States, and thus it made sense to produce the cheapest grades of paper in Canada (Guthrie, 1941). IP reacted in two ways to this situation. First, it partly moved its production capacity to Canada, thus adapting to the new institutional environment. Second, it started to switch its focus from newsprint to other grades. Table 2.2.

International Paper’s production structure 1912—2000, per cents of sales.

Phase / product group 1912 1947 1967 1980 2000

A 0 0 7.5 15 14.9

B 0 8.4 5 10.7 3.2

C 85.3 36.2 11.5 28.0 25.5

D 14.7 55.4 23.8 24.3 28.5*

E 0 0 31.7 16.9 25.8**

F 0 0 1.3 5.1 2.1

Sources: Annual Reports 1908—2000. Abbreviations: A=lumber products and building materials; B=pulp (for sale); C=newsprint and other paper grades; D=kraft f paper and board; E=converted packaging products; F=others; *=includes kraft paper, board and converted packaging products; **distribution business.

At the beginning of the second period, IP had moved its strategic focus from newsprint production to kraft paper and board and had converted some of its old northeastern mills to produce special paper grades. A major technological and strategic change was the switch from sulphite cellulose to sulphate (Cohen, 1984), which made it possible to use faster-growing raw materials such as southern pine. Simultaneously, IP started to expand its ownings of timberland. As stated in Table 2.3, the common nominator for almost all strategic actions in the 1920—1940s was vertical integration. From the 1920s to the 1980s, related diversification was the primary method of growth. In contrast, unrelated diversification was relatively rare before the 1970s. In the 1950—1960s, however, almost 80 per cent of all strategic events were related to diversification strategies. Table 2.3.

Diversification-related strategic events 1898—2000, per cents. Phase 1898-1944 1945-1962 1963-1980 1981-2000

Related Unrelated Diversification, Diversification Diversification both types 43.75 3.75 47.50 72.41 3.45 75.86 42.55 12.77 55.32 29.33 13.33 42.67

Sources: The database available at: http://www.cc.jyu.fi/~jaojala/.

In the 1920s, IP invested aggressively in hydro-electronic plants. As a consequence, the company was temporarily re-structured in 1928 to include International Paper

INTERNATIONAL PAPER 1898—2000

35

and Power Company as a holding company that owned the IP and its hydroelectric business.5 As in the 1890s and in 1913, the company had again to change its strategy for institutional reasons in 1935 when the Public Utility Holding Act forced IP to divest itself of most of its hydroelectric plants.6 With business related to sulphate pulp IP was more successful. In 1947 its production structure was a combination of kraft papers and boards, and it had started to sell some amount of market pulp as well. In the beginning of the third period, the strategic logic of related diversification was even more visible: converted products made almost one third of sales in 1967, and together with market pulp and kraft papers (and board) over sixty per cent. At this stage, only 11.5 per cent of sales came from printing papers. Furthermore, in the 1960s IP had taken its first steps to produce wood products, including lumber, plywood and other building materials7. If related diversification was IP’s strategic focus in the 1920—1960s, the next decade was characterized by unrelated diversification. IP had started Arizona Chemicals already in 1930, but in the late 1960s and 1970s it diversified to the textile industry, the health industry (Davol), land development, shipping and crude oil business. Moreover, IP started to produce pure plastic consumer packaging materials in the 1967. As a consequence of this diversification strategy, IP’s structure of sales was relatively well balanced to all parts of its production chain in the 1980s. However, the focus was still on wood-based production. At the end of the fourth period, the biggest structural change was the emphasis on distribution business, which accounted for over 25 per cent of IP’s sales in 2000. Furthermore, IP divested itself of the majority of its unrelated businesses during the 1980s. An interesting historical detail is that in 1985 IP sold its last newsprint production facilities and thus gave up its original business segment8. 3 GEOGRAPHICAL FOCUS The overall impression of the changes in sales structure is that IP has switched its production focus from newsprint to other grades of paper and to other related businesses as well. The same logic is evident from a geographical perspective (Chandler, 1977). During the first two decades of the 20th century, International Paper’s primary operational focus was in the northeastern parts of the United States and in Canada. Printing paper production and the use of sulphite pulp as the basic raw material made it rational to maintain production near the original location of the 17 original mills. During the 1920s IP made two major investments in Canada: Three Rivers Mill in 1921 and Gatineau River Mill in 1925. These integrates started to produce newsprint and simultaneously the old mills were either remodelled or closed (Guthrie, 1941).

5 6 7 8

International Paper Annual Reports 1920—1935; International Paper Company After Fifty Years. Ibid. International Paper Annual Reports 1945—1970. International Paper Annual Report 1985.

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JUHA-ANTTI LAMBERG

N

S

Canada 1898-1930 1960-1980

Europe

USA 1930-1960

1960-2000

Pasific Rim 1990-2000

Figure 2.1. International Paper’s geographical centres of strategy 1898—2000. Annual Reports 1908—2000.

The possibility to use southern pine and other hard woods in sulphate pulp production was the primary motivation to move the focus to the southeastern states ((International Paper Company, 1948). During the 1920—1940s, almost 25 per cents of all strategic events were focused in the Deep South and Arkansas. The movement started in 1925 by the acquisition of the Bastrop Pulp & Paper Company in Louisiana and continued with major investments in Alabama, Arkansas, Georgia, Florida and Mississippi. IP both founded or purchased new mills and collected timberland to secure the raw material supply of these production centres. During the 1950—1960s, IP started to expand to the northwestern parts of the United States and started the first overseas activities as well. In the northwest, the acquisition of the Long-Bell Lumber Company was not only a strategic move towards a wider geographical presence, but also towards a major presence in the wood products business. Overseas investments started with the converting business, but later IP made major actions especially in the Australasian region via the acquisition of Carter Holt Harvey Company in New Zealand in the 1990s. Table 2.4.

The distribution of strategic events according to the geographical location, per cents.

Phase 1898-1944 1945-1962 1963-1980 1981-2000

USA 81.25 70.69 72.34 58.67

Canada Outside home-continentt 18.75 0.00 18.97 10.34 11.70 15.96 4.00 37.33

Sources: The database is available at: http://www.cc.jyu.fi/~jaojala/.

Total 100.00 100.00 100.00 100.00

INTERNATIONAL PAPER 1898—2000

37

Despite the accumulating pace of overseas internationalization in the 1960—1990s, the move to the south in the 1920—1930s remains the biggest strategic change in the geographical sense. Another important feature in domestic production location was the tendency to start converting businesses near to major marketing areas in the major urban areas. In a way IP moved from backwoods to cities during the 1950— 1960s. Canada’s importance was greatest during the first two periods. The formation of Canadian International Paper in 1925 reflects well the strategic value of that region9. However, in the 1980—1990s, almost 40 per cent of all strategic actions were directed overseas, which implicates the industry-wide change in the competitive situation. 4 PRODUCTION VOLUME, PRODUCTIVITY AND FINANCIAL PERFORMANCE In the paper and pulp industry it is actually hard to find companies with similar production structures10. Thus, the only way to measure the scale of a company are different aggregate level attributes such as turnover, assets and liabilities, and measurements of productivity. In this part, IP’s historical development will be reflected against its financial performance, which links together different structural outcomes and the strategic events. The most noteworthy phenomenon in the development of the scale of production in IP is that on a relative basis its fastest growth occurred between 1908 and 1944. Measured in turnover, IP’s growth rate was almost six hundred per cent. In comparison with for example its Scandinavian competitors, IP’s position as a first comer with a big production volume seems to have created a beneficial position for expanding its sales. During the next period (1945—1962), IP’s growth rate was roughly 170 per cent, but in 1963—1980 only 72 per cent. The slow growth in the 1960s provided at least publicly the motivation to move towards unrelated diversification. In the 1980— 1990s, the growth rate was again nearly 200 per cent, not because of the unrelated businesses, but because of the big M&A wave of the late 1980s and 1990s. At the beginning of the 1980s, the divestments of unrelated businesses and the closing of mills contributed to a temporary diminishing of sales. As noted in earlier studies, IP’s investments after the Second World War followed the same cyclical rhythm as in other P&P companies (Artto, 1995b). Moreover, this phenomenon is familiar from strategy management research as well: companies make large investments occasionally, and they need time to restructure themselves (Mintzberg, & Waters, 1982). What is noteworthy is IP’s relatively low investment rate overall, and especially in the 1980s.

9 10

Canadian International Paper was sold in 1980. In fact, the use of wood-based raw materials is the only common denominator in the so-called population of the wood processing industry. Further discussion regarding definitions of populations in Hannan & Freeman, 1989.

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JUHA-ANTTI LAMBERG

35000 30000 25000 20000 15000 10000 5000

98

19

91

84

19

77

19

70

19

63

19

19

56

49

19

42

19

35

19

19

28

21

19

14

19

07

19

19

19

00

0

Sources: Annual Reports 1908—2000.

Figure 2.2. International Paper’s turnover 1908—2003, — millions of 2003 U.S. dollars. 20

6000

18

5000

16 14

4000

12 10

3000

8

2000

6 4

1000

2

00 20

96 19

92 19

88 19

84 19

76

72

80 19

19

68

Investments

19

19

64 19

60 19

56 19

52

0 19

19

48

0

Investments from sales %

Sources: Annual Reports 1908—2000.

Figure 2.3. International Paper’s investments and investment ratio (%) 1949—2003, millions of 2003 dollars.

A major difference between IP and for example m Finnish companies was IP’s almost non-existent debt before the 1970s. Only rarely has IP’s debt been over 30 per cent

INTERNATIONAL PAPER 1898—2000

39

of the turnover, except in the 1930s when the amount of dept was over 200 per cent of turnover. 20 18 16 14 12 10

00 20

19

96

92 19

19

88

84 19

19

80

76 19

19

72

68 19

19

64

60 19

19

56

52 19

19

48

8

Sources: Annual Reports 1930—2000.

Figure 2.4. International Paper’s capital turnover 1948—2003, in months.

120000

0.35

100000

0.3 0.25

80000

0.2

60000

0.15

40000

0.1

20000

0.05

Emp loy ees

03

20

99

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95

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91

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67

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59

19

55

19

19

19

51

0

47

0

Productivity

Sources: Annual Reports 1949—2003.

Figure 2.5. International Paper’s number of employees and productivity (turnover / employees) 1949—2003.

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The low amount of debt (Figure 2.4) is reflected in the capital turnover figures as well. Except for the high-debt 1930s, IP has been a quite efficient user of capital. Generally, the large holdings of timberland and assets bound to paper and pulp machinery have traditionally made IP’s position as well as the whole P&P industry very capital intensive. As illustrated in Figure 2.5, the stable number of employees between the Second World War and the 1980s reflects both the mature position of the company and the technological development that made possible improvements in productivity. In the 1980—1990s, the number of employees more than doubled as a consequence of the expansive moves into new geographic production areas and markets. 2000 1500 1000 500 0 -500 -1000

19 08 19 14 19 20 19 26 19 32 19 38 19 44 19 50 19 56 19 62 19 68 19 74 19 80 19 86 19 92 19 98

-1500

Sources: Annual Reports 1908—2000.

Figure 2.6. International Paper’s net profitt 1908—2000, millions 1995 dollars.

Regarding financial measurements, the long-run profitability of IP is the best evidence of its sound position, especially in North American markets. During the 20th century it had only three unprofitable years. Even in the 1970s IP was able to remain profitable although the company quite openly criticized its own structure11. The steady accumulation of profits together with the tendency to diversify its businesses implies that the strategic emphasis has not been as conservative as has been stated. It would be more accurate to define the main strategy line as survivalseeking, a phenomenon that will be addressed more from the perspective of the event analysis. 11

For example in 1978, the Chairman of the Board, Stanford Smith, described International Paper as “[having] a history of inept management…weak in its marketing, bogged down in commodity-grade products, and dominated by “papermakers” dedicated more to keeping the mills running full-out than to turning an adequate profit. In terms of management sophistication, the company has been strictly a backwaterr outfit…short even of a corpor r ate stru r cture suited to its bulk.” Fortune, January 30/1978.

INTERNATIONAL PAPER 1898—2000

41

45 40 35 30 25 20 15 10 5 0

00 20

96 19

88

92 19

19

84 19

80 19

72

76 19

19

68 19

64 19

56

60 19

19

52 19

19

48

-5 -10

Sources: Annual Reports 1908—2000.

Figure 2.7. International Paper’s return on invested capital 1908—2000, per cents.

Even though the return on invested capital (Figure 2.7) is a most sensitive measurement of profitability (because of different methods for defining the structure of a balance sheet in different periods), in IP’s case it gives more support to the positive scale effects as well as successful survival strategy. Especially during the second and third periods (1945—1980) the company was a very good investment from any perspective. The diversification to the converting business in the 1940—1960s was inevitably a rational action that gave IP a possibility to fully use the growing demand caused by fast overall economic growth in the urbanizing r United States. In contrast, the return on investments in the 1980—1990s was relatively low. As in Enso-Gutzeit’s case, the volatility of profitability and other financial measurements in different periods makes the analysis of strategic events a fruitful perspective in analysing how strategic action is linked to organizations’ economic performance. 5 STRATEGIC ACTIONS IN INTERNATIONAL PAPER 1898—2000 In retrospective analysis, the flow of strategic events (over time) is basically a measurement of logic. One could argue that the mental model or corporate logic reflects to the strategic actions, i.e. that the events are results of decision-making processes where these mental models have formed organizations’ strategic thinking (Melander, 1997; Miller, & Chen, 1994). A more practical perspective, like in this study, is that corporate actors have made strategic decisions, trying simultaneously to understand what is happening in and around the organization, and what is going to happen in the future. Thus, the realized strategic events can be interpreted in many different ways. The strategic action perspective, however, emphasizes the

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interactive role of these events: they have been actions and reactions in competitive situations and in different contexts (Grimm, & Smith, 1997; Näsi, 1996). The positions of strategic actions in the product chain offer a most interesting perspective on the question of organizational survival (de Geus, 1997b). For example, organizational ecologists argue that vertical integration and diversification are basically survival strategies: with a diversified production structure an organization tries to secure its existence even if some of its businesses are going to reach the end of their life-cycle (Burgelman, 1990; Burgelman, & Mittman, 1994; Hannan, & Freeman, 1977, 1984). Transaction-cost economists see vertical integration as an attempt to lower transaction costs by linking suppliers and markets to the organization via formal agreements (Arrow, 1975; Bonaccorsi, 2001; Emons, 1996; Harrigan, 1985; Ohanian, 1994).12 In the P&P industry, the cruciality of pulp, for example, has been found an explanation for upstream integration in the 1920— 1930s (Ohanian, 1994). A third perspective on diversification is the business logic explanation (Melander, 1997): P&P companies have traditionally seen their business as dependent on business cycles, and thus diversification has been a strategy for stabilizing the cyclical nature of the industry. Table 2.5.

International Paper’s Strategic Actions in the Value Chain. Percentage of strategic actions per period.

1. Raw materials (timberland etc.) 2. Sawmills 3. Pulp (mechanical and chemical) 4. Paper 5. Paperboard 6. Panel, plywood, veneer 7. Paper and board converting 8. Marketing and distribution 9. Other related 10. Multiple categories 11. Unrelated business Total

Period 1 Period 2 Period 3 Period 4 9 0 1 3 0 2 7 4 10 0 4 1 36 7 20 14 7 4 6 3 3 0 0 4 13 74 35 19 0 4 2 12 3 0 3 3 10 9 10 22 10 0 11 15 100 100 100 100

Average 3 4 4 20 5 2 32 5 2 13 10 100

Sources: The database available at: http://www.cc.jyu.fi/~jaojala/.

All the aforementioned explanations fit with IP’s strategic actions in the 20th century. During the first period, IP invested in new products (board) but simultaneously purchased timberland and emphasized production centres in which the pulp production was integrated in paper-making facilities. From the transactioncost perspective, these tendencies can be interpreted as efforts to reduce transaction costs by integrating the supply of raw materials in the production chain (Ohanian, 1994). From the industry wisdom point of view, vertical integration in the upstream is rational because it is cheaper to transport paper than pulp (Diesen, 1998; Guthrie, 1941). Furthermore, the dependency on cheap raw material underlined the importance of possessing at least some amounts of one’s own timberland. 12

Discussion on transaction cost theory in North (1985) and Williamson (1975).

INTERNATIONAL PAPER 1898—2000

43

The third explanation for the upstream integration during the 1920—1940s is the organization’s tendency to improve its survival capacity. The 1913 import tariff elimination, among other environmental threats, seems to have acted as a catalyst that motivated IP to widen its businesses both upstream and downstream (Arrow, 1975). This claim is supported by the strategy to integrate downstream in converted products after the Second World War: over two thirds of strategic actions in the second period led to a strong position in a totally new business area in converted products. Thus, IP had created a situation where it had at least three or four strong operation arenas instead of the one it had at the beginning of the 20th century. During the third and fourth period, IP continued its downstream integration in distribution, but simultaneously it made major strategic actions in other parts of the production chain. One could say that IP had achieved a secure position for organizational survival via the integration down- and upstream in the 1920—1960s, and after that it continued to operate by balancing between different strategic cores. Of course, IP’s moves especially to the converting business were rational adapting strategies as well, because the development, for example, in the retail sector inevitably created a demand for packaging products. In short, IP did right the things at the right time during the 1930—1960s. The negative result of extensive diversification was, however, that IP has not had a dominant role in any segment since the 1930s, despite its greatest overall sales13. Table 2.6.

The Nature of International Paper’s Strategic Actions by type 1898—2000, per cents.

Period 1 Period 2 Period 3 Period 4 Total

Acquire 30 24 17 63 34

Build d 53 72 56 11 46

Sum 83 96 73 74 79

Selll 9 0 10 7 7

Close 9 4 17 20 14

Sum 17 4 27 26 21

Total 100 100 100 100 100

Sources: The database is available at: http://www.cc.jyu.fi/~jaojala/.

The dominant size of IP during the whole period has had an influence on the nature (Table 2.6) of its strategic actions during the 20th century: practically all actions have been either acquisitions of production facilities or divestments. Mergers or cooperative actions have been practically non-existent except during the last period when a couple of major mergers were carried out14. The relatively large number of divestments in all periods is a reflection of size as well: the need for classic-type portfolio management has been emergent since the 1920s when the company closed or sold its original small-scale mills in New England15. From the 1960s on, IP clearly adopted an experiment-divestment 13 14

15

Business Week, July 28/1980. It should be noted, however, that bigger companies usually define both merger and acquisition processes as mergers. In fact, in the late 1970s, IP adopted the Boston Consulting Group’s famous growth-share matrix approach. Forb r es, June 15/1976.

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procedure. This lead to several big acquisitions that were regularly followed by divestments. The unrelated diversification process in the 1960—1970s illuminates well this phenomenon since almost all major acquisitions were sold until mid 1980s. 6 ORGANIZATIONS FIT IN WITH THE ENVIRONMENT A visualization of IP’s strategic history illuminates how dependent the organization has been on its environmental context. Strong impulses from institutional or competitive fields have stimulated IP to respond with reallocation of resources. Furthermore, the path visualization illustrates the logic of the strategic actions from the viewpoint of the path-dependence propositions. The first major environmental stimulus was the elimination of the paper import tariff in 1913. Simultaneously with technological development using the sulphate pulp method, the de facto erosion of the market leadership position in newsprint motivated IP to invest in the hydroelectric business as well as to shift the emphasis of its business to the southeastern states. For example, the expansion into hydroelectric production was a diversification strategy in its classic form. From the path metaphor perspective, however, we can interpret it as creating a temporary new path, partly isolated from the main strategic route. The next major transition, expansion into converting business in the 1950— 1960s, was on the one hand a response to the changes in the retail and transportation sector, which created a strong demand for packaging equipment. On the other hand, the converting business was built on the existing production capacity in board paper. Thus, the creation of a new route was a logical path-dependent process. Later, the route integrated back to the main path, implicating that the converting business changed from being a side project to being a part of the main corporate strategy. An interesting period in the strategic development of IP was the period of unrelated diversification in the 1960—1970s. In public discussion the company tried to distance itself from the traditional image of the paper producer. In strategic actions this was identifiable as a flow of new investments into several new business segments. At the same time, new top managers coming from outside the industry argued for “modernization” of the company and even speculated with the possibility of abandoning the original name of the company16. It is illustrative that during the 1960—1970s, IP did not make any major investments in paper production. There is a certain irony, however, in the fact that the clearly most (strategically) unproductive era in the company’s history was sold to the shareholders and the business press as a period of emerging professional strategic management including a new company structure, services of major consulting companies and new inexperienced (in P&P industry) general managers.

16

See International Paper Annual Reports 1967—1983; Forbes, June 15/1976; Fortune, January 30/1978; Business Week, July 28/1980.

CHAPTER 3

A COMPANY AND THE STATE: ENSO-GUTZEIT1 JUHA-ANTTI LAMBERG Helsinki University of Technology e-mail: [email protected]

1 INTRODUCTION The Norwegian Hans Gutzeit founded W. Gutzeit & Co. and its first sawmill in Kotka, a Finnish port town, in 1872. After almost fifty years of expansion, Aktiebolaget W. Gutzeit & Co, renamed and restructured in 1896, was sold to the State of Finland in 1919. The Norwegian principal owners wanted to break free from the risky new state and there was subsequent will in Finland to buy Gutzeit and along with its hundreds of thousands of hectares of forests. In the interwar period, Enso-Gutzeit (renamed again in 1924) was both the biggest sawing company as well as the largest company in Finland. Under William Lehtinen’s leadership the company was developed into a diversified company in the 1950s and 1960s. A merger with Swedish Stora in 1998 and further the purchase of Consolidated in the spring of 2000 placed the company among the biggest wood-refiners in the world.2 Among the Finnish forestry industries, Enso has been a counterforce against the forestry companies that were tied to banks and the forestry industries influenced by agrarian capital. The mixing of business and politics has been a characteristic feature, which has separated the government-owned wood-refining companies from other forestry blocs. Enso-Gutzeit’s relationship with party politics has been a close one ever since it became government owned (Kuisma, 1993a). 1

2

The text refers to the company’s under the forms Enso-Gutzeit, Gutzeit or Enso, and after 1998, StoraEnso. On the official names of the company, see Jorma Ahvenainen, Enso-Gutzeit Oy 1872-1992, 2: 1924-1992 (Jyväskylä, 1992b). Earlier versions of this chapter were published in Juha-Antti Lamberg, Strategic Action and Path Dependence (2005) and Näsi et al, Metsäteollisuuden strategiset kehityspolut (2001). See for example ibid. On the Stora merger, see Stora-Enso’s Annual Report 1998. On the Consolidated deal, see Talouselämä, 11/2000; on the largest wood-refiners in the international markets, see Artto, Suomen teollisuuden strategioista ja kansainvälisestä kilpailukyvystä. Yhteenvetoraportti (1995b).

45 Juha-Antti Lamberg, Juha Näsi, Jari Ojala, and Pasi Sajasalo (eds.), The Evolution of Competitive Strategies in Global Forestry t Industries: Comparative Perspectives, 45–63. © 2006 Springer. Printed in the Netherlands.

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Based on its asset value, Enso has been a large company throughout Finland’s period of independence (since 1917). At times its domestic competitors felt it was not fair that the State was the largest owner and the guarantor of investments in Enso. Yet for example in the 1970s Government ownership and the massive balance sheet provided ample reason for making reference to the government-owned company syndrome. This definition refers to a situation in which the representatives of the owners have additional interests to look after the detriment of the success of the company. This makes it difficult to make unpleasant decisions. The interests of the owners can even prevent the management from taking actions which might have a positive influence on the functioning of the company, because such activities might hurt the additional interests of the representatives of the owners. It is a typical feature of the government-owned company syndrome that the profitability and other basic functions of the company are defined in an imprecise manner. Thus, the owner accepts a low level of performance as a starting point (Veranen, 1988). The idea of the government-owned syndrome builds on the shareholder ideology. The starting point in that stream of thinking is that the basic task of a company is to function profitably and maximize the interests of the owners (Jensen, 1997; Prahalad, 1997; Stern, Stewart, & Chew, 1997). Thus, the actions of a company are analysed from the perspective of the owners and the functioning management of the company. A study undertaken by a Finnish economist, Matti Pohjola (1996), on the productivity of the investments made by Finnish companies, argues that the inefficient investments of companies are harmful not only for the companies themselves but for the economy as a whole. Enso-Gutzeit is included in Pohjola’s calculations and represents, with other forestry industry companies, the worst class of efficiency in investments (Pohjola, 1996; Artto, 1995b). This chapter analyses the historical development of Enso-Gutzeit primarily from the perspective of the common theme in the book, the perspective of strategic events.3 A description of the strategic evolution provides enlightenment on the strategic vision of the functioning management in the company — whether conscious or subconscious4. Using claims made by advocates of the shareholder perspective, an attempt is made to show which factors influenced the strategic choices. These claims are provocative as far as the State’s business activities are concerned, because they stem from the expected returns of a private owner. In this chapter it is not meant to accept or reject the validity of the maximization of the owners’ interests, but rather to analyse the changes in the profitability demands set for Enso-Gutzeit as historically bounded processes. The starting point is that the informal and formal rules that governed the actions of the company’s management changed over time, and were also altered by the functioning management itself (North, 1990). The perspective of the owners’ interests is utilized as a tool with which to compare the normalcy of the company’s set purpose with respect to other forestry industries. 3

4

On the definition of strategic game, see Näsi, “Competitive Strategy Making as Game-Playing: Basic Definitions and Background Mapping.” (1996). Compare with Porters concept of strategic game, Competitive Strategy: Techniques for Analysing Industries and Competitors (1980). On definitions of strategy, see Mintzberg, “Crafting Strategy.” (1987)

ENSO-GUTZEIT

47

This chapter reviews at first the changing structure of Enso-Gutzeit’s production and the factors that influenced this change in the long run. After this, we will seek an answer to the question of the efficiency / inefficiency of these activities. A starting point here is the claim that the invested capital should be in as efficient use as possible (Artto, 1995b). Changes in the strategy are reviewed with the four-layered event data model that was described in the introduction. At the end of the article we will revisit the question of what significance the exceptional ownership structure had on the functioning of the company’s management. In particular, the actions of Chief Executive Officer Pentti Salmi during the time of Olavi J. Mattila and afterwards are used as an example. The material that describes the company’s economic activities has been collected from the Annual Reports, which are the source for the modified income calculation and balance board series according to the recommendations of the advisory board of business research. Quite a lot of literature dealing with Enso-Gutzeit has been published. The most comprehensive presentation is Jorma Ahvenainen’s two-part history of Enso-Gutzeit. The Table 3.1 shows the total number and frequency of actions per each period. Table 3.1.

Enso-Gutzeit: Number of Actions per Period, Average Annual Number of Actions (actions/year in a period), and the Share of Joint Ventures per Period. Years

Period 1 Period 2 Period 3 Period 4 Total

1918-1945 1946-1960 1961-1980 1981-1998 1918-1998

Number of actions 22 20 21 31 94

Actions/year Share of joint Joint ventures ventures 0.8 5 1 1.4 0 0 1.1 10 2 1.8 13 4 1.2 7 7

2 FROM A LARGE SAWING COMPANY TO A LARGE WOOD-REFINING COMPANY Two key managers within Enso-Gutzeit emphasized self-assuredly in an interview in 1992 that the company could live with both the State and the heavy capital structure. This interview told a lot about the company’s culture and economic affairs: the State had been a lazy yet affluent owner, which on the one hand had made large investments possible and on the other had given the functioning management relatively free rein to operate.5 The extensive autonomy of the functioning management can be seen in the history of the development of the company, which can be divided into periods according to the different managing directors. Earlier, during the period of V. A. Kotilainen (1924—1945, 1stt period), who managed among other companies the Kajaani Joint-Stock Company, the Enso-Gutzeit Joint Stock Company was formed and a merger was carried out with, among others, Tornator. The emphasis in 5

Talouselämä, 41/1988; cf. Veranen, 1988.

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production was at first on sawing (Table 3.2), yet large investments turned the production of pulp into the largest branch by the time of the Second World War. During the period of Kotilainen, Enso-Gutzeit also invested in chemical industries and power plants (Ahvenainen, 1992b). During period of William Lehtinen (1945—1962, 2ndd period), the level of refinement was increased again. Paper, kraft and board, and packaging industry products became the most important product groups. A typical feature during the period was the diversification of production.6 Shipping, and up to a degree also machine tool activities, became an important part of business in Enso. Production was also broadened towards board and house industries. Lehtinen was a bold investor who in a short time put Enso-Gutzeit on its feet after the considerable losses suffered during the war. Eight large paper and carton machines were built in Lehtinen’s time, and production facilities were also established in Kaukopää and Summa (Ahvenainen, 1992b). Table 3.2.

Enso-Gutzeit Oy’s production structure, 1924—1999, per cent of turnover.

Period / product group 1 (1924-1945) 2 (1945-1961) 3 (1962-1981) 4 (1982-1999)

A 35.6 13.5 6.0 6.5

B 42.1 17.2 6.0 8.0

C 13.2 25.0 22.0 55.0

D 13.2 28.5 44.0 22.8

E 0.0 8.8 5.0 ..

F 9.1 32.1 39.0 7.7

Sources: Enso-Gutzeit’s Annual Reports 1982—1997; Stora-Enso Annual Reports 1998;; Ahvenainen, 1992b. Abbreviations: A=lumber products, B=pulp, C=paper, D=kraft, board, and packaging industry products, E=board industry products, F=others, * = calculated according to the sales of Stora-Enso in 1998.

After the departure of William Lehtinen, Enso-Gutzeit encountered problems, especially in the 1970s. During the period of Pentti Halle (1962—1972, beginning of 3rdd period), the company initiated production outside Finland. At this time EnsoGutzeit joined, for example, the Kitimati factory project in Canada (Ahvenainen, 1992). After the short and quarrelsome period of Aarne T. Hilden (1972—1974), Pentti Salmi started out with a difficult beginning period as Manager Director (1975—1981). In 1982—1992, under Salmi’s leadership, Enso-Gutzeit was built into the company that was eventually able to merge with Stora on equal terms in 1998. Kraft, board and especially packaging industry products had become the most important concentration areas by the year 1982. These product groups also formed a great risk for the development of the company because, especially in the packaging industries, plastic was about to surpass cardboard. Also paper maintained its position in the company’s portfolio, but the relative share of sawing and pulp production was on the decline. The economic significance of shipping was at its greatest in 1975, 6

According to Artto (1995b), the rate of diversification f at the beginning of the 1980s was approx. 22 per cent for Finnish forestries and 17 per cent for Swedish, 14 per cent for Canadian and 13 per cent for American companies. From this point of view, the nearly 40 per cent share of production other than wood-refining defined by Artto for Enso-Gutzeit was quite high.

ENSO-GUTZEIT

49

when the share of shipping transport turnover in the entire company’s turnover was about 15 per cent (Karonen, 1992). Table 3.3.

Enso-Gutzeit’s diversification-related strategic events 1898—2000, per cents. Phase 1898-1944 1945-1962 1963-1980 1981-2000

Related Unrelated Diversification Diversification Diversification 30.00 10.00 40.00 20.00 12.00 32.00 15.79 10.53 26.32 16.67 8.33 25.00

Source: The database is available at: http://www.cc.jyu.fi/~jaojala/.

In a way, the middle 1970s were a turning point in Enso-Gutzeit’s strategic orientation. Since the early interwar years, it had diversified more and more, partly half-accidentally, partly intentionally (Table 3.3). The growth of the shipping business is a good example of how very small investments in domestic shipping services in the 1920s started an unrelated diversification path. That path continued and expanded in the postwar years when Enso-Gutzeit organized its shipping activities into Finnlines Ltd. The rationale behind Finnlines was to secure E-G’s transportations in the difficult but simultaneously promising business environment (Karonen, 1992). Similar actions were undertaken in other paper and pulp industry companies as well, but the scale of E-G’s shipping business increased much more than that of other companies. Thus, the outcome of the 15 per cent share of all sales in the 1970s was a result of a half-intentional strategic path that eventually began to live a life of its own. It is noteworthy that Enso’s diversification was characteristically incremental in comparison with for example International Paper, in which the unrelated diversification in the 1960—1970s was a product of strategic planning procedure7. Pentti Salmi began a turnaround of Enso-Gutzeit in 1982 after many unprofitable years. The company sold most of its ships, a large proportion of its power production capacity and power lines and tens of thousands of hectares of forest in a couple of years. The company’s strategy was defined as specialization in its core competencies, increasing the level of refinement and the selling of the units that were not a part of the core competencies. After the quick divestments of the beginning of the 1980s, the concentration areas of the activities were altered more moderately. Enso gave up shipping for good by 1986, whereas the board industries, house industries, and several power plants were sold in early 1990.8 In Salmi’s and Härmälä’s time, Enso-Gutzeit was developed not only by concentration on and investment in new production, but also by purchases of companies and mergers. The acquisition of Tampella’s forestry industries from the 7

8

However, at the end of the 1960s and the beginning of the 1970s Enso used McKinsey’s consultants in strategy analysis. Quite interestingly, McKinsey proposed that Enso should maintain its existing portfolio in the short run, but move out of the paper and pulp business in the long run. Enso-Gutzeit Annual Reports 1982—1990; Talouselämä, 1/1983; Ahvenainen, 1992b. Compare Kylmälä, 1986.

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Bank of Finland in 1993 was the next major acquisition after the Ahlström deal in 1987. In 1995, Enso-Gutzeit and another State-owned P&P company, Veitsiluoto, became Enso. Eventually, Enso merged with Swedish Stora in 1998.9 The first joint year of production for Enso and Stora indicates that the concentration on the core competencies was a success. The biggest and most profitable product group was printing paper, and especially newsprint paper was very profitable for the company in 1998. The next-biggest production unit is the packaging industry. Sawing and the production of pulp remained jointly below 15 per cent of the company’s turnover. The combined share of the turnover for these four key production branches suggests that the company was in the late 1990s once again concentrating on wood processing. Table 3.4.

Enso-Gutzeit’s internationalization-related strategic events 1898—2000, per cents.

Period 1898-1944 1945-1962 1963-1980 1981-2000 Average

Finland 100.00 100.00 63.16 75.00 84.54

Outside home-continent 0.00 0.00 21.05 5.56 6.65

Europe 0.00 0.00 15.79 19.44 8.81

Total 100.00 100.00 100.00 100.00 100.00

Source: The database is available at: http://www.cc.jyu.fi/~jaojala/.

From the internationalization point of view (Table 3.4), E-G’s strategic events follow the same incremental development path as in diversification. The first events occurred in the 1960s when E-G started its unsuccessful Kitimati experiment in Canada. After the divestment of that business, Enso in a way started a new internationalization period with investments in Germany, among other European countries, and continued with the Stora merger and finally with the acquisition of Consolidated Paper in 2000. 3 ECONOMIC PERFORMANCE Enso-Gutzeit began its efforts to become a worthwhile player in international woodrefining products apparently already in the 1960s. The main strategy has been to strive for mass production with a high degree of refinement. The hope was that this would lead to cost leadership based on scale advantages.10 The growth in turnover was indeed fast in the post-war period. Enso was able to keep up with the common development process in the industry, but it was not able to overtake its largest domestic competitors until the late 1990s. This can be considered a problem, because even at the beginning of the 1990s all Finnish wood-refiners, including also Enso-Gutzeit, were too small to achieve, for example, the cost 9

10

Enso-Gutzeit Annual Reports 1993—1995; Enso Annual Report 1996; Stora-Enso Annual Report, 1998. On the numerous publications of the Artto project, see e.g. Artto, (1995b). On cost leadership, Porter, 1980.

ENSO-GUTZEIT

51

leadership position indicated by Porter. The merger with Stora and expansion into the United States, however, were steps in this direction (Porter, 1980). In the interwar period, the growth in turnover was moderate, in practice following the fluctuations in the world trade trends. In contrast, the period of William Lehtinen in Enso was a time of fast expansion. Turnover grew by 158 per cent in 1948—1961. During the years 1962—1981, growth was about 107 per cent. The growth percentage in 1982—2000 was almost 800 per cent, including among others the Veitsiluoto merger in 1995 and Stora in 1998. However, the 1990s for Enso, similar to other Finnish forestry companies, was a time of exceptional growth.11 18000 16000 14000 12000 10000 8000 6000 4000 2000

19 34 19 39 19 44 19 49 19 54 19 59 19 64 19 69 19 74 19 79 19 84 19 89 19 94 19 99

0

Sources: Enso Gutzeit’s Annual Reports, 1945—2003.

Figure 3.1. Enso-Gutzeit’s Turnover, 1930—2003, in millions of 2003 $.

The real growth in turnover is directly linked to the productive capacity of the company, i.e. ultimately to the investment policies. In 1958—2000, Enso-Gutzeit experienced eight major investment peaks. The leader-centrism of the company’s activities can be seen in the fact that the changes of managers seem to have induced a strong investment peak every time. Enso-Gutzeit’s investments were at their highest level in the 1970s. In relation with turnover, the investments did not, however, usually rise to the same level as for example in Metsäliitto (Lamberg, & Ojala, 2001). In addition, the investments of Enso were spread over several, often even unconnected branches such as the building of cruise liners. During the peak years of the late 1980s, Enso’s investments 11

Enso-Gutzeit Annual Report 1995; Talouselämä, 19/1995. The growth rate of the Finnish forestry industries in 1986—1997 was 191 per cent. In Sweden in the same time period, the growth in turnover was 89 per cent, in Canada 26, and in the United States 15 per cent. Further discussion in Artto & Juurmaa, Performance and international competitiveness of listed paper industry groups 1991-1999 : Finland vs. Sweden, Canada and USA, Helsingin kauppakorkeakoulun julkaisuja B (2000).

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represented approx. 40 per cent of the turnover, which was a very high rate of investment by any international standards (Artto, & Juurmaa, 2000). 1600

50 45 40 35 30 25 20 15 10 5 0

1400 1200 1000 800 600 400 200

Investments

03

00

20

97

20

94

19

91

19

88

19

85

19

82

19

79

19

76

19

73

19

70

19

67

19

64

19

61

19

19

19

58

0

Investments/turnover

Sources: Enso-Gutzeit’s Annual Reports, 1958—2000.

Figure 3.2. Enso-Gutzeit’s Investments (Left Axis), s in millions of 2003 $, and the investments’ ratio to turnover (Right Axis) 1958—2003.

Wood-refining industries are typically a sector in which technique, raw materials and energy are more important factors of production than labour. The fact that EnsoGutzeit’s number of personnel remained in practice at the same level throughout the interwar period is an indication that the tough investment schedule was intended to increase efficiency. The relation of turnover (Figure 3.3) to the number of personnel does not provide an entirely accurate picture of the changes in efficiency, yet the direction is clear: whereas an employee brought in a little less than 22,000 1995-dollars in sales in 1948 and 44,000 in 1960, in 1997 one employee brought in as much as 0.3 million dollars in sales. Thus, although the relative employment effect of Enso-Gutzeit has diminished continuously, its productivity has improved. The most dramatic change, however, occurred in the 1990s, when the productivity (turnover/number of employees) increased by over 125 per cent.

ENSO-GUTZEIT

53

50000 45000

0.4 0.35

40000 35000

0.3

30000

0.25

25000 20000

0.2 0.15

15000 10000

0.1 0.05

99

96

19

93

19

09

19

87

19

84

19

81

19

78

Employees

19

75

19

72

19

69

19

66

19

63

19

60

19

57

19

54

19

19

51

0

19

19

48

5000 0

Productivity

Sources: Enso-Gutzeit’s Annual Reports, 1948—2000.

Figure 3.3. Enso-Gutzeit’s Personnel, 1948—2003 (Left Axis), and Turnover in Relation to Personnel, (Right Axis) in Millions of 2003 $.

4 THE MINIMIZATION OF LOSSES AS THE GOAL A company is considered to produce economic value added for its owners when the amount of capital invested in it brings in a return greater than the costs of the capital to. According to shareholder thinking, an investment made on the basis of one’s own equity involves a big risk and thus the investors have to demand a high return on their investments. Economic value added is only one measure of how to calculate the profitability of a company. It has the built-in notion that a company’s function is to bring in as much profit as possible for its owners (Stern, Stewart III, & Chew, 1997). On the basis of historical materials it is difficult to calculate the economic value added.12 This principle, however, is important, because it reminds us that one’s own equity is more expensive than loan capital. In the case of Enso-Gutzeit, the State, meaning the taxpayers, should have received a better return from the company’s activities than from a risk-free investment, with an added risk premium. The State’s special position as an owner can be seen in the fact that there have been periods in Enso-Gutzeit’s activities when the company has been presented with profitability demands deviating from shareholder thinking. For example in the 12

Economic value added = invested capital * (return on the capital invested in the company – the cost of the capital invested in the company). Of these variables, it is especially difficult to calculate the return on the invested capital and the costs of the capital in a long time frame due to the ever-changing bookkeeping practices and the announcement duties. Also, the calculation of the risk premium on the costs of the equity capital would be very difficult. On EVA and its application, see ibid.

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1970s, the company was expected to bring in a reasonable return as well as function in a societally responsible fashion. Ahvenainen (1992b) perceives that the fundamental function of Enso-Gutzeit was in fact not the maximization of dividends, but rather the development of the company in such a way that it would not become a financial burden on the State. The principles of maximization of economic profit and minimization of losses are both perspectives of a company and its owners. Pohjola (1996) has reminded us that an inefficient company is a burden on the entire economy. In this respect, the economic performance of Enso-Gutzeit was not merely the problem of the State, but that of the entire economy. The same applies to other forestry industry companies as well, because according to Pohjola’s calculations the efficiency of these investments was poor throughout the 1980s and even at the beginning of the 1990s. Pohjola in fact reminds us of the general principle in business economics according to which the company should then have been dissolved and the funds invested in other more profitable activities if the company management were to act in the interests of the owners. Pohjola’s (1996) claim that the depression of the 1990s was the outcome of inefficient uses of capital is provocative. Enso-Gutzeit alone cannot be blamed for the periods of meagre economic performance in the Finnish economy. However, from the perspective of the main theme in the research, i.e. the strategic action, it is interesting that efficiency in the use of capital has varied greatly between the periods of different directors. 35 30 25 20 15 10 5

19 31 19 36 19 41 19 46 19 51 19 56 19 61 19 66 19 71 19 76 19 81 19 86 19 91 19 96 20 01

0

Sources: Enso-Gutzeit’s Annual Reports, 1931—2003.

Figure 3.4. Capital Turnover 1931—2003, in months.

The relation of the final sum of the asset balance to turnover represents how efficiently the capital invested in the company has been put to use. Changes in

ENSO-GUTZEIT

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bookkeeping methods naturally affect the results obtained. However, the basic picture of the efficiency of the use of capital by Enso-Gutzeit is quite clear. With the exception of William Lehtinen’s period, the business activities have been, on the basis of this indicator, quite inefficient. The reason for the inefficiency and the poor circulation velocity of the capital cannot be found solely in the functioning management. On the one hand, for example, the large forestry capital decreases the efficiency automatically, because the average rate of return calculated for forests is considerably below the return on generally used risk-free investment in bonds. On the other hand, Enso has always been heavily in debt which is directly reflected in its capital turnover rate. However, from the slack point of view, in certain situations slow capital turnover might be beneficial as well. Artto (1995b), for example, considers that the forests are the best kind of capital because they enable positive cash flow also during depression years.13 The efficient administrative period of William Lehtinen was apparently in some respect a response to the war-time loss off machinery and land property: the use of capital became more efficient temporarily when the lost production capacity was replaced with new capacity. At the same time, also the international economic conditions were favorable for the forestry industries. On the whole, the use of capital by Enso-Gutzeit has, however, been quite inefficient when measured by the relationship between available capital and turnover. For example, the level achieved in the 1990s can be compared with the capital circulation velocity of Nokia, in general considered efficient, during four months in 1998. Also in international forestry industry comparisons the circulation velocity of Enso-Gutzeit’s capital is poor.14 When the net result (Figure 3.5) of Enso-Gutzeit is reviewed from the 1970s to the 1990s, one should not expect a very high rate of return on the invested capital. The net result that is used as an indicator of the actual activities of the company does not give a favorable picture of Enso-Gutzeit’s activities in this period. The worst years date to the beginning of the 1980s. It was at this time that Olavi J. Mattila had to give up the chairmanship of the board of directors and Pentti Salmi began the turnaround of the company. The two years off negative results at the beginning of the 1980s are also an exception to the normal economic development of the forestry industries, which has usually also had a strong impact on the results achieved by Enso.15 A good rate of return on capital is considered to be over 15 per cent, an adequate one 10—15 and a poor one 5—10 per cent return. Less than a five per cent return on invested capital is considered inadequate. By these criteria, the profitability of EnsoGutzeit in the 1970s and 1980s was between poor and inadequate. By international standards, the wood-refining industries are a low profitability sector. Compared with

13

14 15

Artto, (1995b). Artto’s impression of the significance of forests for the cash flow of a company is an exaggeration, because e.g. in Enso-Gutzeit only about ten per cent of the required wood comes from its own forests. In the 1960s, this ratio was still over 20 per cent. On Enso-Gutzeit’s forest management, see Ahvenainen, (1992b). Nokia’s Annual Report 1998. On international comparisons, Artto, (1995b). On the sensitivity of the Finnish wood-refining industries to economic conditions, see ibid.

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the profitability figures presented by Artto (1995b), the results of Enso were not exceptionally bad.16 2000 1500 1000 500 0

01

96

20

19

91

86

19

76

81

19

19

71

19

61

66

19

19

56

19

51

19

19

46 19

41

19

36

19

19

31

-500

Sources: Enso-Gutzeit’s Annual Reports, 1974—2000.

Figure 3.5. Enso-Gutzeit’s Net Profit, 1931—2000, in millions of 2003 $.

The profitability of Enso-Gutzeit during the last three decades cannot be considered favorable if one considers that the rate of return for a company should be at least equal to the interest rate that the company has to pay on its debts. It seems, however, that the profitability of Enso has corresponded to the economic conditions for example in 1985—2000, when the State as the primary owner demanded that the company should be profitable. In contrast, the situation in the 1970s reflects the government-owned company syndrome, when the owner of the company had additional interests that proved detrimental to the profitability of the company. Ahvenainen (1992b) considers that in the 1970s the company was, in a questionable sense, a tool for politics, and that during this period nothing of strategic importance was accomplished.17

16

17

For the years prior to this, it is not possible to calculate reliably the return due to the different bookkeeping practice. On the return on investedd capital in the paper industries, see ibid. Ahvenainen, 1992b. In reality, Enso’s financial situation was even worse than that published. In the early 1970s for example, a major part of Enso’s divisions had a negative return on capital.

ENSO-GUTZEIT

57

14 12 10 8 6 4 2 0 -2

96

01 20

19

91 19

86 19

81 19

76 19

71

19

66 19

61 19

56 19

51 19

46 19

41

36

19

19

19

31

-4

Sources: Enso-Gutzeit’s Annual Reports, 1974—2000.

Figure 3.6. Enso-Gutzeit, rate of return on invested capital, 1974—2000, per cent.

Based on the economic measures, it seems that the ownership question had most impact on the financial results of the company in the 1970s. From the perspective of the strategic event data analysis, we may therefore ask: What made this period special in terms of the strategic events; meaning the level of strategic decisionmaking? 5 WITH A GOVERNMENT MANDATE IN THE COMPETITION The perspective given by event data on strategic decision-making brings to the fore not only the internal power factors of a company, but also its attitude towards the competitors and the business environment. The analysis of Enso-Gutzeit’s productive activities indicates large differences in productivity and concentration between the different development periods. It also seems obvious that the functioning management’s possibilities of affecting the company’s strategy have been rather extensive, with the exception of the third development period (1962— 1982). The event analysis enables us to review next how well the differences between the development periods can be seen at the level of strategic actions. This analysis incorporated 97 events in 1918—2000.

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Table 3.5.

Enso-Gutzeit Oy’s strategic events’ placement in the production chain, per cents.

1. Raw materials (timberland etc.) 2. Sawmills 3. Pulp (mechanical and chemical) 4. Paper 5. Paperboard 6. Panel, plywood, veneer 7. Paper and board converting 8. Marketing and distribution 9. Other related 10. Multiple categories 11. Unrelated business Total

Period 1 Period 2 Period 3 Period 4 0 0 0 7 36 15 14 13 14 5 14 3 0 5 19 10 5 30 14 0 5 5 10 7 0 0 0 0 0 0 5 3 0 10 5 3 23 5 14 27 18 25 5 27 100 100 100 100

Average 2 19 9 9 11 6 0 2 4 18 19 100

Source: The database available at: http://www.cc.jyu.fi/~jaojala/.

The placing of the events in different production periods indicates that Gutzeit had already functioned for a long time before the move into Government ownership. The actions that had to do primarily with the acquisition of raw materials have been few, and even most of those have concerned more the acquisition of energy rather than wood. The emphasis of the actions in the first development period on semi-refined products confirms that the emphasis was on sawn goods and pulp also at the level of strategic thinking. In the second and third development periods, the emphasis in the activities was on finished products, namely paper, paperboard and packaging industry products. The emphasis placed on multi-level openings in the last development period was a feature which is common to all growing forestry companies. This is natural in a situation in which the company on the one hand has to buy companies as an addition to its organic growth and on the other hand has to sell units that fit in poorly with the portfolio. Marketing has not really occupied a very central role in Enso-Gutzeit. The events of the third development period have, however, been even more dramatic: it was at this time that Enso began to break free from the national sales cartels (Heikkinen, 2000).18 Table 3.6.

The Nature of Strategic Actions in Enso-Gutzeit, per cents.

Period 1 Period 2 Period 3 Period 4 Total

Acquire 36 25 29 42 34

Build d 45 60 43 19 39

Sum 82 85 71 61 73

Selll 5 0 14 32 15

Close 14 15 14 6 12

Source: The database available at: http://www.cc.jyu.fi/~jaojala/.

18

On cartels, see Enso-Gutzeit’s Annual Reports 1980 and 1987.

Sum 18 15 29 39 27

Total 100 100 100 100 100

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The big size of Enso can also be seen in the fact that it was not necessary for Enso to acquire domestic production power through alliances. In turn, the fact that units were sold off already during the first development period is a sign of the longevity of the activities. For example, in Metsäliitto significant divestments of activity did not take place until the last period (Lamberg, 2001b). The concentration on core competencies undertaken by Pentti Salmi and Jukka Härmälä can clearly be seen during the fourth development phase: almostt 40 per cent of the transfers were sales of units, dissolutions or negations of cooperation. Another sign of this can be seen in the fact that 80 per cent of the actions during William Lehtinen’s time were acquisitions of units or establishments of units: the wartime losses had to be made up for and the company was too big to form an alliance with domestic competitors. In the case of Enso-Gutzeit, the event data analysis emphasizes the conclusion formed already earlier concerning the uniqueness of the third development period. Poor profitability, an unclear framing of the functions, a phlegmatic attitude towards the competition situation and unsuccessful investments such as in shipping all point towards a poor management culture. 6 THE UNEVEN RELATIONSHIP BETWEEN THE OWNER AND THE FUNCTIONING MANAGEMENT: THE CASE OF OLAVI J. MATTILA The situation referred to as the Government-owned company syndrome, in which the additional interests of the owners hamper the management of a company, is almost a direct description of the administrative situation in Enso-Gutzeit in 1972— 1983, when Olavi J. Mattila was, as a representative of the State, the company’s chairman of the board of directors (Veranen, 1988). The mixture of politics and business in the leadership of Enso was not a particularly new phenomenon. Already the purchase of the majority of the shares in Gutzeit in 1918 was a purely political decision, undertaken in the Diet, at the background of which one can detect on the one hand the foreign policy predicament of Finland between Germany and Great Britain, and on the other hand the domestic politics of Finland, which would not permit the foreign ownership of hundreds of thousands of forest hectares (Ahvenainen, 1992b; Kuisma, 1993a). In the interwar period, Gutzeit functioned mainly according to the same conditions as other wood-refiners. The biggest difference was the possibility of Government officials and politicians participating in the administration namely through the administrative board. Finnish historian Markku Kuisma (1993a) has argued that the Government-owned companies were even on a larger scale a way to the top in economic life for the Finnish-speaking top officials. As an example he uses A.K. Cajander, who was the chairman of Enso-Gutzeit’s administrative board in 1931—1943. Representing Finland’s small social elite, Cajander was also a politician, and since the administrative board in the interwar period consisted also of Presidents P.E. Svinhufvud, Lauri Relander, Kyösti Kallio, as well as leading social democrat politician Väinö Tanner as the representative of the Social Democrats, it is no wonder that the administrative board became the organ that decided the company’s strategy. The company’s board of directors, the governing body, was the so-called internal board, which consisted off the managing director, the chief of the

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legal division, the directors of the Enso and Kotka mills, the director of the sawing division and the forestry director of the company. When Enso transferred to a divisional M-form of organization in the 1960s, the heads of divisions sat on the board of directors (Ahvenainen, 1992b). The governing structure of Enso-Gutzeit worked well during the periods of Kotilainen and Lehtinen. Strong professional directors balanced the power of the administrative board and also maintained the functionality of the internal board. On the one hand, the departure of William Lehtinen as the managing director, and on the other, the State becoming more active in governing business in the 1960s, began the politicization of Enso-Gutzeit.19 The situation came to a head in 1972, when Aarne Hildén, who had been groomed to become the new managing director since 1968, was chosen as the successor to Managing Director Pentti Halle. The choice of Hilden was opposed by the contemporary Managing Director of Valmet, a major stateowned company in the metal industry, Olavi J. Mattila, who wanted to lead the forestry company himself. As far as Hilden and Enso were concerned, Mattila’s aspirations were made problematic by President Kekkonen’s open support. When Mattila could not, despite numerous efforts, be appointed as the managing director, the Ministry of Trade and Industry forced the administrative board to convene an extraordinary meeting of the board of directors, in which Olavi Mattila was chosen, in effect with Kekkonen’s mandate, as the full-time chairman of the board of directors. The appointment of Mattila to the board of directors made the managing of Enso-Gutzeit quite difficult due to the political tensions embedded in the decision, and Aarne Hilden was forced to resign as early as 1974. Pentti Salmi was then appointed the next managing director. In the following years, the deterioration in the financial status of the company amplified the criticism levelled against it. When accountants at the beginning of 1982 urged the company management to initiate reorganization measures, the administrative board appointed a separate working group to monitor the company’s activities. At the same time Salmi obtained the possibility to begin the reorganization of the company: Enso was once again turned into a pure wood-refining company, and for example the shipping activities were abandoned. Mattila lost his strongest supporter when Kekkonen resigned as President of the Republic in 1981. Mattila’s position on the board of directors became impossible and he announced his resignation in November 1982. After Mattila, Salmi was also appointed chairman of the board of directors, in which function he continued until 1991. Salmi relinquished the position of managing director in the company in 1988. After this, Jukka Härmälä served as the managing director, and from 1992 onwards as chairman of the board of directors as well. Olavi J. Mattila’s dual mandate as chairman of the board of directors of EnsoGutzeit and Valmet may be one of the strangest a and least functional arrangements in Finnish economic history. It is also an example of what kind of problems Government ownership may create if the State does not treat what it owns as a good owner should. The problem becomes amplified if the company’s administrative 19

Talouselämä, 15/1966.

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board is passive or it is not given the opportunity to influence the managing of the company. A typical feature in the management of Enso-Gutzeit in the last years of the 1970s was the concentration of power in Salmi, who wanted changes, and to Mattila, who was opposed to changes. In this situation, quite understandably, the board of directors could not become a very critical opposition. The administrative board, in turn, did not interfere with the matter until at a later stage, after criticism from the accountants and the resignation of President Kekkonen. 7 INSTITUTIONS GOVERNING BUSINESS ACTIVITIES Enso-Gutzeit was still functioning in the 1970s in a managed economy, illustrated in the introduction as a closed system, of which typical features were low interest rates, a low threshold for devaluation and a taxation practice favouring investments. When even the State allowed the company to produce poor results for quite a long time, it is no wonder that the company ended up in a profitability crisis. On the other hand, the relatively positive development of the 1980s and 1990s shows that the State too can be a good owner if its framing of the goals follows the normal basic principle in business activities (Veranen, 1988). Enso-Gutzeit has had a dual relationship with the State throughout the period of Finland’s independence. Whereas on the one hand, the State has been the chief owner of the company on the other, the State, according to the rational choice type of institutional theory (North, 1990; Scott, 1995), has defined the formal rules governing business activities. For example, the taxation principle favouring investments mentioned above or the at least permissive attitude towards cartels before the 1990s are examples of such formal rules of the game. There are also other kinds of rules in a society, i.e. informal rules. One can make references to culture, manners or even good business practices. Together the formal and informal rules form an institutional framework within which companies function (see North, 1990). The Finnish national growth strategy — which has on the one hand featured a high rate of investment and on the other low labour productivity — has been criticized in recent research, focusing on the reasons of Finland’s economic depression in the 1990s (Lilja, Räsänen, & Tainio, 1992; Räsänen, 1993; Tainio, Korhonen, & Ollonqvist, 1989). It has been argued that nationalistic thinking about growth caused the creation of excess capacity for example in the forestry industries. The State made possible the successful fulfilment of the national programme by building a control system which was designed to shield companies from market mechanisms (Pohjola, 1996). The Finnish devaluation culture is a good example of the State’s attitude towards the functional conditions of large industries (Pekkarinen, & Vartiainen, 1993). Olavi J. Mattila, for example, saw devaluation and State support generally as primary methods for turning around Enso in the late 1970s. One outcome of the national growth project has been the high rate of investment. Investments have been made at the expense of consumption, and they were inefficient for both the economy as a whole as well as for the companies themselves. This represents the view that the 1990s depression was the end of a particular

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historical process. The control has been stopped due to necessity, and a market mechanism has been accepted in its place (Pohjola, 1996; Veranen, 1988). The highly successful development of the wood-refining industries in the latter half of the 1990s contradicts the claim regarding inefficient investment: In the long run, these investments have in fact been useful and have made growth to a global player possible. The owner’s interest type of thinking, instead, has been adopted in Enso as well as in other forestry companies, which apparently has in turn improved the profitability of these companies (Artto, & Juurmaa, 2000). From the perspective of the new institutional economic theory, companies will attempt to maximize their income within the established institutional environment or attempt to change the rules if the expected returns from such activities are large enough. Single companies, therefore, are not such passive adaptors as the so-called old institutional theory claims. They also function actively in the political markets, where the rules of the game are moulded, if the expected returns are attractive (North, 1990). Enso-Gutzeit has functioned in the political markets among other forestry companies since 1918, at first as a member of the Central Federation of Woodrefining Industries and later in the Forestry y Industry Association. In principle, it has had the best possible information on the State’s economic policies, and also an opportunity to influence these policies. Enso, similar to other forestry companies, was not merely an object in a national growth strategy (Lamberg, 1998, 1999; Lamberg, & Skippari, 2001; North, 1990). Even though the society favoured for example a heavy investment policy before the 1990s, the companies themselves made the decisions concerning their expenditures and caused their own difficulties—or successes, as in the latter half of the 1990s. The State’s role in Finnish economic life has been great, yet it would be wrong to say that this was, for example, the reason for overinvestments. It is ultimately possible for the companies themselves to solve their own problems. A good example is Enso’s situation in the 1970s when Mattila’s role was central, yet the company had a whole range of other problems as well: the downturn in the packaging industry, losses suffered in cruise line activities, an unsuccessful internationalization strategy and unclear framing of functions, which were also influenced by the leadership vacuum created by the departure of William Lehtinen. In Enso-Gutzeit Joint Stock Company, the large ownership share of the State has in general provided the functioning management with a lot of room to manoeuvre. A good example of this is the directorship of William Lehtinen. The role of the State has, therefore, been largely determined by who sat on the company’s administrative board, and in the 1970s, on the board of directors. Good representatives have enabled the company to grow, whereas bad ones have obstructed the management of normal business activities. One may, however, ask whether the aim of the company’s managers was to achieve growth rather than to ensure profitability.

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8 SUMMARY The aim of this chapter has been to review w the development and the strategic choices of Enso-Gutzeit in 1918—2000, at a time when the company was owned by the State. The research hypothesis was that ownership by the State had a strong impact on the development of the company, especially during the leadership crisis of the 1970s. In comparison to, for example, IP, Enso has grown more incrementally, building its strategic decisions on the already existing product facilities. Although Enso started with lumber business and developed its production portfolio first through pulp production and then though paper and paperboard, it did not abandon its original activities. Before the 1980s, Enso’s activities were characterized by diversification and the concentration of investments in organic growth. The expansive investment policy of the 1960s and 1970s emphasizes the effects of leader-centrist features typical of Government-owned companies: The company invested aggressively, although its financial status was very poor in the late 1970s. The targets of this expansive investment policy were, among others, Eurocan factories in Canada and cruise liners in the Baltic Sea and the Atlantic. The return on these investments remained poor, yet the projects related to wood processing brought in good results in the 1990s. In this sense, the criticism by Pohjola in 1996 regarding the overinvestments of the forestry companies seems premature. One can of course also ask how much the persons in Enso learned from the Eurocan project for their new conquest of North America (Eriksson, Majkgard, & Sharma, 2000). The only notable exception in Enso’s development path was its expansion into shipping business during the 1940—1970s. Otherwise, it responded to environmental stimuli with incremental strategic changes following general trends in the paper and pulp industry. However, it is noteworthy that the environmental influences were quite similar as in the case of International Paper. This verifies the argument of the strong influence of the global industry wisdom in the P&P industry.

CHAPTER 4

COMPARING THE STRATEGIC EVOLUTION OF GEORGIA-PACIFIC, MEAD AND WEYERHAEUSER ANNA AHOLA Helsinki University of Technology e-mail: [email protected]

1 INTRODUCTION Competitive action has been defined as a market-based move designed to build or defend competitive advantage and performance. Research in competitive dynamics focuses on competitive actions and reactions, competitive advantage and performance (Smith, Ferrier, & Ndofor, 2001). Its goal, as noted by Chen and Miller (1994), is to look beyond the theories off competitive rivalry, and to empirically observe the companies’ actual competitive moves. As Smith et al (2001) observes, the early studies in competitive dynamics concerned product introductions and competitors’ countermoves in the banking and high technology photography businesses (MacMillan, McCaffery, & van Wijk, 1985; Bettis & Weeks, 1987). Next, the research shifted to studying responses of competitive actions in high-tech industries (Smith, Grimm, Chen, & Gannon, 1989) and antecedents and consequences of competitive action in the airline industry (Smith, Grimm, Gannon, & Chen, 1991; Chen, Smith, & Grimm, 1992; Chen & MacMillan, 1992; Chen & Miller, 1994; Miller & Chen, 1994; Chen & Hambrick, 1995; Chen, 1996; Miller & Chen, 1996a; Miller & Chen, 1996b; Baum & Korn, 1996; Hambrick, Cho, & Chen, 1996; Smith, Grimm, Wally, & Young, 1997). Later studies have tested findings in the software industry (Young, Smith, & Grimm, 1996) and in multiple industry studies (Ferrier, Smith, & Grimm, 1999). The studies mentioned above have been statistical in nature. The earliest studies, including MacMillan 1985, which studied 11 product introductions, used primary data such as interviews as sources. The research done in the early 1990s used secondary data collected from trade magazines. Researchers used large samples within one industry and developed detailed action-type classifications. E.g. many airline industry studies covered 17-32 airlines, in a 7-8 year period, and included 65 Juha-Antti Lamberg, Juha Näsi, Jari Ojala, and Pasi Sajasalo (eds.), The Evolution of Competitive Strategies in Global Forestry t Industries: Comparative Perspectives, 65–105. © 2006 Springer. Printed in the Netherlands.

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about 900 actions. Later studies, like Young and Ferrier, used databanks to study selected SIC code companies in a 7-8 year period, with Ferrier’s specific focus being on leader-challenger pairs. Much of the research has focused on action and response characteristics (Table 4.1), and the predictability and profitability of competitive actions. Actions and responses have been analyzed according to their attributes, e.g. action irreversibility has been found to decrease response likelihood (Chen & MacMillan, 1992). Other research areas have included the inertia and simplicity of competitive actions, and leader-challenger dynamics and multipoint competition. Table 4.1.

Action and response characteristics and predictability.

Predictors of action Environment Company Strategic similarity Past experience Product differentiation Past performance Resource similarity Market share Market commonality Slack Market growth Awareness Entry and exit barriers Motivation Number of firms Size Industry concentration Age Information availability Management

Characteristics of Action Response Radicality Timing Magnitude Speed Threat Delay Irreversibility Imitation Visibility Match Centrality Difficulty Speed Likelihood Timing Visibility Aggressiveness Number and order of responders

Source: Smith et al., 2001.

Recently, there has been a call for studies in different industries and research on the antecedents of competitive action (Smith ett al., 2001). Additionally there has been demand for more longitudinal research (Ketchen, Snow, & Hoover, 2004). Building on these observations, the research objective of this study is to explore the longitudinal competitive dynamics in the forest industry. This study makes three contributions. 1) The forest industry differs from the earlier samples by being a mature capital intensive industry where technology innovations and consumer pricing moves have a smaller role. 2) A long time frame is taken, spanning over 100 years. 3) The study uses a case approach. Cases give an in-depth picture of competitive dynamics within the selected companies, and allow us to see the antecedents for taking competitive action. The previous research has strictly limited itself in observing the interplay of actions and responses. As the objective of competitive dynamics is to observe empirically how the companies compete, the intention of this research is to broaden the perspective into observing the antecedents of competitive actions. The study is explorative and industry-specific. While the three case companies do not represent the entire industry, they are seen as sufficient to provide insights into the industry dynamics. The case companies, Georgia-Pacific, Weyerhaeuser and MeadWestvaco, were chosen from the top of the 2003 PPI top 100 listing by using the following rules: 1) they are American forest industry companies, 2) they have not been owned by foreign companies to a major degree, and 3) they operate mostly in the traditional

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forest industry, not e.g. in consumer products. PPI is the Pulp and Paper International magazine, which publishes a global top 100 listing every September based on the previous year’s data. Georgia-Pacific, Weyerhaeuser and MeadWestvaco were the 2nd, 5th and 7thAmerican companies, if measured by pulp, paper and converting sales. International Paper was the first, but it was excluded because it is covered elsewhere in this book. The 3rdd and 4th were Procter & Gamble and Kimberly-Clark, but they were excluded as being too consumer business oriented. The 6th was Smurfit-Stone Container Corporation, but it has been significantly owned by a European group. MeadWestvaco is the product of a merger between Mead and Westvaco in 2002. To simplify the research, only the Mead branch of its history was followed. Mead was chosen, because it was 42 years older as a company, and because its historical orientation to the more mature paper business broadens our view of the industry evolution mechanisms. The cases were built with replicated logic and triangulated from several sources. The companies’ moves were gathered into a database on a yearly basis from the Moody’s International Industry Manuals, Factiva and Paperloop news services, company Annual Reports and histories. Longitudinal narratives were written using temporal bracketing to distinguish between strategically different periods. The strategic actions were quantified by using a coding manual designed by and tested with two senior researchers and two doctoral students, and analyzed quantitatively. The coding had 3 major categories and 17 subcategories, and addressed what had happened, in which product category, and whether this was jointly or alone. The coded data included 1308 strategic actions made by the case companies before 2004. The actions concerned capacity and ownership changes and were strategic in nature. (Yin, 2003; Langley, 1999; Eisenhardt, 1989). This article is divided into four parts: 1) the historical narratives of the case companies, 2) comparing the case companies’ financial and strategic development, 3) reflections on the cases, and 4) conclusions. 2 HISTORICAL BACKGROUNDS 2.1 Georgia-Pacific Corporation 2.1.1 Introduction Georgia-Pacific is a company which has experienced many transformations in its lifetime. It has turned itself from a small building products merchant to a big building product manufacturer. Then it turned into a large U.S. pulp, paper and converting business. In the new millennium, Georgia-Pacific turned itself into one of the world’s largest tissue producers, and refocused its business by divesting its forestland and its long-time core business in building products merchanting. Table 4.2 shows how the company’s center of gravity has moved down in the value chain. Despite the recent refocusing, the building products manufacturing business is still an essential part of the company. In the course of action the company headquarters moved from Georgia to Oregon and then back to Georgia again. International sales were significant in its

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early years; then after WWII the company’s business was domestic-oriented. In the new millennium the company has gained a position as a significant international tissue producer. Acquisitions have often been the tool of choice for Georgia-Pacific to grow and change its product portfolio and positioning. Table 4.2.

Development of Georgia-Pacific’s product portfolio as percentage of net sales.

Lumber Plywood Pulp, packaging & paper Tissue Other Total

1950 1965 1975 1985 1995 2003 17 7 18 21 16 12 73 38 30 25 21 17 0 36 29 22 42 28 0 8 6 32 11 19 23 24 15 11 100 100 100 100 100 100

Average 15 34 26 12 17 100

Source: Georgia-Pacific Annual Reports. Distribution sales included in each row. In cyclical businesses like the forest industry, net sales measure the relative importance of a product area better than the volatile net profits. f “Other” includes e.g. the production of chemicals.

The historical analysis is divided into four parts. The first period (1927-1946) signified the birth and initial growth. The company was a merchandiser of lumber, plywood and veneers in the South and expanded into sawmills. In the second period (1947-1959) the company moved more strongly to manufacturing, expanded to the West Coast and its distribution developed toward national coverage. At the very end of this period the company started diversifying into pulp, paper and chemicals. The third period (1960-1982) brought diversification and fast growth in building products, chemicals, pulp and paper businesses. The fourth period (1983-2003present) has witnessed strategic concentration, major acquisitions, divestments and closures. 2.1.2 From merchanting to manufacturing (1927-1946) The Georgia Hardwood Lumber Company was incorporated in September 1927. The founder of the company was Owen R. Cheatham, who started the business by acquiring a wholesale hardwood lumber yard in Augusta, Georgia. Only two years after the incorporation, the nation fell into the Great Depression, from which it did not recover until after the Second World War. Especially difficult were the years 1929-1933, when personal consumption expenditures fell 40 percent in the U.S. (Hughes & Cain, 1994, p. 460). Georgia Hardwood weathered the difficulties because it stayed small and kept overhead expenses low, e.g. in 1934 it had only five employees. As a wholesaler, the company did not own timberland and avoided the land taxes that troubled many of its peers. At the time, the company ideology was to first develop product markets and an effective sales organization by merchanting, and then to select suitable manufacturing facilities to supply the markets (Georgia-Pacific Annual Report, 1948). Under the slowing demand in 1932, they created markets by starting a hardwood export business to Europe. In the mid-1930s came a vertical expansion, as

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the company acquired three hardwood and two softwood sawmills in the South. The war effort in WWII consumed lumber both in the U.S. and in its allies, like Britain, which was somewhat cut off from Scandinavian lumber markets. The company responded to growing demand by acquiring additional sawmills and lumberyards. It also ended up as the largest army supplier, by founding a distribution lumber yard to serve army needs. After WWII, the Marshall Plan generated some additional demand in Europe. In the 1940’s exports represented about one third of the company’s sales (Georgia-Pacific f Annual Report, 1948). To attract customers, the company wholesale warehouses also carried d items manufactured by others. E.g. in 1943 the company had added Douglas fir plywood and lumber to its warehouse offerings. 2.1.3 Expanding the business (1947-1959) After the war, demand for new housing soared in the U.S. and Georgia Hardwood saw increasing demand for plywood. Plywood brought three times the returns of lumber (Monroe, 2001, p. 45, p. 50). The northwestern part of the U.S. produced two thirds of all the plywood, and unlike the Northwestern Douglas fir, the Southern softwoods were not suitable for plywood production. In 1947 Georgia Hardwood expanded to Northwestern plywood by acquiring the Bellingham Plywood Company in Washington. In the process, Georgia Hardwood took its first public financing. Georgia Hardwood soon bought two more plywood producers in the Northwest and one hardwood plywood producer in the South. It consequently changed its name to Georgia-Pacific Plywood and Lumber Company. Within three years the company had turned into the nation’s largest plywood producer. In 1951 the company name was shortened to Georgia-Pacific Plywood Company, to reflect its changed status. In 1953 the company moved its headquarters from Georgia first to Olympia, Washington, where it now had several plywood mills, and the next year further to Portland, Oregon. In 1956 its name was shortened to the current form, GeorgiaPacific Corporation. In 1949 the plywood prices collapsed, due to a recession, and stayed low because of competition and better utilization of wood (Monroe, 2001, p. 50). Georgia-Pacific decided to move into timberland ownership to be able to control its raw material costs and to ensure the availability of the large old-growth peeler logs for its plywood operations (Monroe, 2001, p. 55; Georgia-Pacific Annual Report, 1951). Their fear for log supply was reasonable, since the plywood industry had significantly grown in the past few years; reforestation was not yet generally practiced, thus causing the land price to rise with the growing log demand; and due to the observation that the new-growth logs were significantly smaller than the huge old-growth timber logs. By the end of the 1950’s, the company owned more than one million acres (400,000 hectares), most of it Douglas fir in Washington and Oregon, although small amount of hardwood was also bought in the South, and oldgrowth Redwood, Sugar pine and Ponderosa pine lands in the West. Georgia-Pacific additionally expanded its product offering to birch veneers and imported logs to produce tropical hardwood plywood. The company financed many of its early

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timberland acquisitions by timber sales, which created some bad publicity as some small sawmill towns feared unemployment after their timber would be gone. After buying a lot of production capacity the company faced a challenge of how to sell the products. This was solved by creating more wholesale building products distribution centers around the country in places with high demand. By 1959 the company had already 60 distribution centers. These warehouses also carried other often-needed supplies like nails, roofing and gypsum. As the operations grew, so did the amount of waste products, like sawdust, bark, peeler log studs, and odd bits and pieces. Larger waste was processed to chips and sold to pulp mills. Smaller waste was burned. The management started thinking about how it could get more value out of company operations and assets. First it increased its chip production capacity. But as the pulp companies were unwilling to pay good prices for the chips, Georgia-Pacific built its own kraft pulp and linerboard mill in Toledo, Oregon, in 1957. In fact, the Toledo mill was the only pulp and paper mill the company ever built (Monroe, 2001, p. 91, p. 20). In 1958 the company entered the chemical business when it started producing resin adhesives from bark and waste for its plywood operations. Additionally the company started surveying the petroleum and mineral deposits in its timberlands to cash in on them by leasing them to other companies. A new company logo was adopted in 1959. The second period ended in 1960 when Robert B. Pamplin started de facto running the company after the company’s founder, Owen R. Cheatham, suffered a stroke (Monroe, 2001, p. 84). Officially Pamplin’s CEO period d started in 1968 when Cheatham retired. 2.1.4 Domestic diversification and fast growth (1960-1982) Georgia-Pacific was run by Robert B. Pamplin from 1960-1975, and after his retirement by Robert Flowerree 1976-1982. Both had made long careers in the company. In this period Georgia-Pacific grew both vertically and horizontally. Geographically it spread over the United States, and to a smaller extent into Canada, Southern Asia and Brazil. The company had three growth areas: building products, chemicals and pulp and paper, as it e.g. stated in Annual Report of 1976. The company expanded simultaneously in these businesses, moved down the value chain into conversion and also integrated into related businesses as it tried to maximize the profits from its resources by converting the by-products of successive manufacturing operations (Georgia-Pacific Annual Report, 1969). Most of the company’s growth took place in the Southern and Eastern r U.S. In 1982 the company moved its headquarters to Atlanta, Georgia, to reflect its changed geographic focus. In the building products sector, the company grew in distribution and manufacture. Its building products distribution business grew from 60 warehouses in 1960 to 158 in 1981, now serving most of the U.S. These warehouses ensured smooth production and better profitability of the mills by their ability to sell the growing number of products. The warehouses also provided expansion opportunities. In the 1960’s Georgia-Pacific integrated backwards to gypsum and roofing production, both of which it had previously sold in its warehouses. The company still followed the ideology of first developing the markets and then moving on to manufacture (Georgia-Pacific Annual Report, 1976).

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Building products manufacturing of lumber and plywood was greatly expanded, mostly in the South and mostly in hardwoods and Southern pine. Between 1960 and 1980, the company’s timberland control grew from about 1 million to 7 million acres (400,000 to 2.8 million hectares). Most of this growth took place in the South, although the company also acquired lands in Oregon, California, Canada, and the tropics. The sudden interest towards Southern pine was caused by Georgia-Pacific’s innovation in 1963 when it succeeded in developing the industry’s first Southern pine plywood. Soon the company had built many Southern pine plywood plants and acquired southern sawmills. However, in 1971 the Federal Trade Commission claimed the firm was lessening competition in the softwood plywood industry and it demanded divestments. This lead to Georgia-Pacific spinning off 20 percent of its assets to the Louisiana-Pacific Corporation in 1972. In the building products and forest sector, the company also added hardboard and particleboard plants, and in the 1980s a couple of oriented strand board plants as demand for affordable boards increased. The company expanded to furniture production in 1967. In the 1960s it gained logging rights to tropical hardwood and started producing mahogany and virola veneer in the Philippines and Brazil. In the 1970s the Asian focus changed from Philippines to Indonesian logging rights and plywood production. In the pulp and paper sector Georgia-Pacific moved into converting and diversified its production. In 1961 the company built a containerboard converting plant for its Oregon containerboard operations. Soon after, it started acquiring containerboard mills and converting plants around the U.S. By 1981 Georgia-Pacific was a nationwide producer of corrugated containers. The company also diversified into bag and sack production, newsprint, groundwood papers, coated and uncoated printing papers, bleached foodboard and tissue. The tissue expansion was inspired by the acquisition of the Crossett Company of Arkansas in 1962, which among various assets included plenty of oak trees that were difficult to utilize in its existing businesses (Monroe, 2001, p. 98). The company decided to build a tissue mill for them. To learn the business, it first acquired two existing tissue producers, one in New York and the other in Washington. In two years Georgia-Pacific turned itself into a nationwide tissue producer. Other expansions were small moves into milk cartons, cups, plates and labels. Between 1960 and 1980 Georgia-Pacific turned itself into a significant supplier of forest industry chemicals. The company grew its existing production and also diversified into related and unrelated chemical products. Related diversifications included raw materials and by products of its current chemicals, such as formaldehyde and ammonia. The unrelated diversifications included e.g. flavor enhancers, paint and varnish, fabric softeners and swimming pool chemicals. In the 1970s the company also expanded to plastics and PVC production, which utilized its existing chlorine business. Georgia-Pacific even bought two oil companies to supply its chemical operations with raw materials. A 1980 Fortune article gives a sense of scale to Georgia-Pacific’s growth. The article compared Fortune 500 companies from 1954 through 1979. The company ranked second in sales growth and earnings per share growth and fourth in stock performance; it was called “one of America’s most voracious acquirers.” According

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to Fortune, Georgia-Pacific had made about 70 company acquisitions during the period (Monroe, 2001, p. 133). However, the acquisitions had indebted the company. Unfortunately for Georgia-Pacific, much of the debt was floating-rate; inflation and interest rates grew significantly in 1979-1981. At the same time demand for housing and kraft paper declined and Georgia-Pacific ended up in difficult cash problems. The general feeling was that the company had no direction and its strategy had to change (Monroe, 2001, p. 137). In 1983 Marshall Hahn took the reins. 2.1.5 Big acquisitions and non-core divestments (1983-2003) Hahn started his period (1983-1993) under severe cash pressures. The answer was to divest all assets not closely related to the company’s core forest products business (Georgia-Pacific Annual Report, 1983). Out went the small milk carton, label and paper plate businesses. Also the furniture business was divested and the company backed off from a plan to build a kraft paper mill in Indonesia and exited from tropical wood production and ownership. As the company returned to health, Hahn began expanding its pulp and paper operations to reduce the exposure to the residential construction cycle (Monroe, 2001, p. 153). First the company doubled its containerboard production by acquiring a corrugated paper mill and 16 corrugated container plants from the St. Regis Corporation in 1984, for 360 million dollars. Next the company divested its commodity chemicals business, the oil company and some other non-core chemical operations, to help pay for the containerboard deal. Then the company moved further into high margin paper grades. It already had converted its newsprint production to printing paper in 1983, and now it converted some kraft paper machines to printing paper, bleached board and linerboard production. In 1987 Georgia-Pacific acquired its long time competitor U.S. Plywood for 215 million dollars. In 1989-1991 it built two big paper machines, adding over 600.000 tons of white paper. In 1988 Georgia-Pacific bought the Brunswick Pulp & Paper for 667 million dollars, which included sawmills and a bleached board mill, and nearly doubled the company’s market pulp production. The next big acquisition was the Great Northern Nekoosa Corporation in 1990 for 3.7 billion dollars. At the time, the deal was the largest combination in the history of the forest products industry, and also has been claimed to be the first hostile takeover effort of one of the leading forest industry companies in the industry (Georgia-Pacific Annual Report, 1990; Williams, 1991). The deal included market pulp, envelopes, fine paper distribution and paperboard converting facilities, and over 3 million tons worth of containerboard, uncoated fine and groundwood paper. The deal made Georgia-Pacific the largest uncoated free sheet and market pulp producer in the U.S., and the second largest containerboard producer in the country. After the deal the company divested the groundwood papers and part of the containerboard assets to help finance the deal. Hahn’s philosophy had been “buying, rather than building primary r mills,” which added market share instead of industry capacity (Monroe, 2001, p. 168). When Hahn retired in 1993, Alston D. “Pete” Correll started leading the company.

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The timing of the Great Northern deal had been bad, as the paper industry went into a downcycle in the early 1990’s and the purchase price had exceeded the fair value by 2 billion dollars (Monroe, 2001, p. 172; Georgia-Pacific Annual Report, 1990). Correll’s task was to improve the company’s financial health, and he started aggressive cost controls. One of the novelties was to run the paper mills to demand instead of running them at full steam, which was the old industry norm (Monroe, 2001, p. 190; Siitonen, 2003, p. 100). Georgia-Pacific continued its divestments, selling the fine paper distribution business, envelopes, roofing business and some other assets. In 1995 the company wanted to improve the efficiency of its 127 independent building products distribution centers by replacing them with 2 big call centers. The change proved more costly and difficult than anticipated (GeorgiaPacific 10-K, 1999). The company doubled its gypsum production capacity in 1996 by acquiring Domtar’s gypsum business for 350 million. In 1998 it acquired CeCorr, which was the largest independent corrugated sheet producer in the U.S., for 275 million, and in 1999 it acquired Chesapeake Corporation’s away-from-home tissue business for 755 million dollars and turned into the third biggest tissue producer in the U.S. In 1999 it acquired Unisource Worldwide, which was the leading independent distributor of paper products, packaging and sanitary maintenance supplies. Actually, the deal brought back the Butler Paper distribution assets that Georgia-Pacific had divested only in 1993. The decade ended with the acquisition of Fort James Corporation for 11 billion dollars in 2000, and was estimated to include 6.6 billion dollars of goodwill value. The deal turned Georgia-Pacific into the world’s largest tissue producer, brought strong brands and increased Georgia-Pacific’s marketing skills. Previously, Georgia-Pacific was perceived to compete with its bigger tissue competitors with price rather than with marketing power. The deal also turned it into a global tissue producer (Georgia-Pacific 10-K, 2000; Monroe, 2001, p. 20). In 2001 Georgia-Pacific again had plenty of debt and the paper markets went into a downcycle. The company started selling and closing down non-cost-effective mills in all its product segments. It also divested part of its away-from-home tissue to SCA to get Department of Justice acceptance for the Fort James acquisition. Away-from-home tissue is tissue bought in larger units e.g. by hotels, schools, and hospitals. Then in 2001 Georgia-Pacific became the first major building products company to divest all its timberland assets when it sold its ownership in the Timber Company. The Timber Company had been established in 1997 as a separate operating group to hold and manage Georgia-Pacific’s timberland assets. In 2001 the company sold all of its stand-alone uncoated free sheet mills to Domtar, representing almost half of its white paper capacity. In 2002 it sold 60% of its newly acquired paper distribution business to an investment group. And finally in 2004 GeorgiaPacific sold its building products distribution business, which had long been one of its core businesses. Since the 1980’s do-it-yourself business had grown more important, and big chains like The Home Depot had grown to serve the market with an extensive product assortment. The company finally stopped seeing its distribution business as a core activity in 2003 when its outlets bought less than 30% of their supply from company-owned manufacturing facilities (Georgia-Pacific press release, 2003).

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In 2003 the company was the largest manufacturer of tissue in the world. In North America it was the largest producer of plywood and oriented strand board, the leader in retail disposable tableware, the leading supplier of wood bonding and industrial resins, the third largest gypsum board manufacturer, the fourth largest lumber, bleached board, kraft paper and containerboard producer and corrugated packaging supplier, and the fifth largest uncoated free sheet producer (GeorgiaPacific Annual Report, 2003). In the future, the company says it intends to move further away from commodity products, toward consumer products and value-added services. This is thought to reduce the impact m of commodity cycles and increase the profit margins (Georgia-Pacific 10-K, 2003). 2.2 Mead 2.2.1 Introduction Mead was a large coated publication paper and bottling industry packaging producer in the U.S. The company was a significant forest industry company through the entire 20th century, but it was never among the top few producers. The company started as a magazine paper producer, and expanded to packaging in the early years. It remained loyal to these product areas, and moved steadily toward more valueadded coated solutions. Its history shows many typical challenges facing a business operating in a mature paper industry sector. The company grew its paper and corrugated board capacities organically, while the non-core capacities, like linerboard and lumber, were systematically grown through joint ventures. The converting and diversified businesses were often grown through acquisitions. Although the company was relatively diversified (see Table 4.3) the paper and packaging businesses often produced the majority of its earnings. The diversified businesses included many kinds of distribution businesses, ranging from paper and school products to industrial distribution. Mead also boldly expanded into unrelated businesses, like metal foundries and rubber, and developed innovative digital solutions like data services and printers. However, it could not make these ventures entirely worthwhile, and in the mid-1990s it focused again on the forest industry. Mead’s story ended with the 2002 merger with Westvaco, which merged the companies’ paper, office products and packaging operations, only to divest the paper production side in 2005. Now MeadWestvaco has several packaging conversion plants abroad, but its cartonboard production capacity is located mainly in the U.S.

GEORGIA-P PACIFIC C, MEAD AND WEYERHAEUSER Table 4.3.

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Development of Mead’s product portfolio as percentage of net sales.

Paper Packaging and Paperboard Distribution, Consumer and office products Industrial Other Total

1950 1966 1976 1985 1995 2000 2003 Average 74 28 26 37 24 44 28 37 20 31 29 32 28 37 53 33 0

41

30

30

48

19

14

26

0 6 100

0 0 100

14 1 100

0 1 100

0 0 100

0 0 100

0 4 100

2 2 100

Source: Mead Annual Reports. In 1978 industrial manufacturing and distribution, and in 19911992 electronic publishing, temporarily brought aabout 30% of Mead’s sales and 15% of its earnings. The 2003 numbers concern MeadWestvaco Corp.

This case study has four parts. In (1846-1945) Mead produced magazine paper, and expanded to specialty white papers and corrugated board in the 1930s. In (19461955) capacities increased, the company entered into joint-venture linerboard production, and started emphasizing costs and scale economies in the magazine papers. The third period (1957-1981) brought increasing diversification. First Mead diversified relatedly into packaging, packaging systems, paper merchanting and lumber. Later it diversified unrelatedly into stationery and furniture, metal castings, rubber, data services and industrial distribution. In the fourth period (1982-2002present) the company increasingly concentrated on producing value-added paper and paperboard, like coated paper, coated kraft board, packaging systems and stationery. In 2002 Mead merged with Westvaco, creating the MeadWestvaco Corporation. 2.2.2 The first 100 years (1846-1945) The roots of the Mead Corporation stretch back to the year 1846, when Colonel Daniel E. Mead and partners established Ellis, Chaflin and Company in Dayton, Ohio, producing book and printing papers. The company was renamed to reflect ownership changes as Weston & Mead in 1856, Mead & Weston in 1860, and the Mead & Nixon in 1866. It became the Mead Paper Company in 1881 when Daniel Mead bought the entire company. Mead prospered and acquired in 1890 the Ingham Mills & Company, a pulp and paper mill in Chillicothe, Ohio, originally founded in 1812. However, Daniel Mead died the following year. His sons Charles and Harry, the next-generation managers, indebted the company. In 1904 banks stepped in and the company was put in the hands of trustees. The banks persuaded Harry’s son, George H. Mead, to reorganize the company. George was a 28-year-old MITeducated cellulose chemist, who already had advanced as the general manager of the Artificial Silk Company, the pioneer manufacturer of rayon. The Mead Pulp & Paper Company was incorporated in November 1stt 1905 in Ohio. It had two paper mills and specialized in white book and magazine papers. (Belsito, 1991, p. 310; Whitaker, 1963, p. 9). G.H.M. consolidated the company operations on the Chillicothe mill. Paper brands were pruned and Mead focused on producing white magazine paper. Several

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paper machines were added in the following years. In 1910 G.H.M. started trading newsprint as a personal business side venture (Whitaker, 1963, p. 10). In 1920 Mead bought a Tennessee soda pulp mill and equipped it with a book paper machine. The next year Mead developed an aggressive sales organization to market its high quality papers. Several of Mead’s competitors also chose to use its sales services (Heinrich, 2001). However, dependence on magazine paper was considered risky and the management wanted to diversify the company (Mead Annual Report, 1954). In 1925 Mead took part in a research endeavor that developed a way to make pulp and corrugated board from chestnut chips used in tanning extract manufacture, previously burned as waste. Soon the company acquired tanning extract facilities and built paperboard machines to utilize tanning chips in Virginia, Tennessee and North Carolina. G.H.M. saw the depression years and low interest rates as an opportunity to grow the company. On February 17th, 1930 the previously independent Mead-related companies, including Mead Pulp and Paper Co., and Mead Paperboard Co., were consolidated to form the Mead Corporation. The consolidation reduced activity duplication and facilitated financing. The company was listed on the New York Stock Exchange in 1935. In the early 1930s Mead invested in research to improve its mass-circulation magazine paper grades. It invented a new machine coating technique for paper and a new filler that gave better printing results and improved the brightness and opaqueness of magazine paper (Mead Annual Report, 1949). Later in 1934 Mead pooled its coating patents with Kimberly-Clark, which allowed them to co-operate in printing paper development and to control the machine-coated paper markets until the early 1950’s (Toivanen, 2004, p. 254, p. 290). Additionally, Mead diversified into specialty white papers and improved its paper merchandising operations by acquiring Dill & Collins Inc in Philadelphia in 1932, and the Wheelwright Paper Company in Massachusetts in 1934. The former was the descendant of the oldest paper mill in the U.S., originally established in 1690; the latter dated back to 1796. In 1938 Mead built with Scott Paper a 50% joint venture bleached sulphate pulp mill in Georgia, the Brunswick Pulp and Paper Company, to reduce its dependence on pulp imported from war-prone Scandinavia (Mead Annual Report, 1940). Some corrugated paperboard machines were added, but Mead’s chestnut chip pulp did not suit linerboard production (Mead Annual Report, 1949). To improve linerboard supply, in 1937 Mead built a big linerboard mill in Florida with Almours Securities, but the partnership did not work and the mill was sold in 1940. In 1941 Mead claimed to have one of the most diversified ranges of printing papers, and to be the largest leather tanning extract producer in the U.S. (Mead Annual Report, 1941). In 1942 G.H.M. retired to the position of chairman, and Sydney Ferguson became the new president (1942-1947). The company headquarters were moved from Chillicothe to Dayton in 1943. During the war Mead built one corrugated paper machine, but mostly focused on growth in printing papers. The Escanaba Paper Company was bought in 1942 and the Manistique Pulp & Paper was acquired in 1943. They expanded Mead’s production in groundwood pulp and paper, and expanded it geographically towards the north, to Michigan. In 1946 Mead bought

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the Columbian Paper Company, which produced soda pulp and white papers in Virginia. Interval of peaceful expansion (1946-1956) Ferguson became chairman of the board in 1948. After him the presidency was given to Charles R. van de Carr (1948-1951) and Howard E. Whitaker (1952-1956). Mead developed an aggressive modernization program in two stages: the first stage increased production (1945-1950), and the second stage (1951-1954) reduced the overall manufacturing costs to the level of their strongest competitors (Mead Annual Report, 1952). Growth was somewhat limited by government price and supply controls, which were not lifted until after the Korean War in 1953 (Mead Annual Report, 1953). The loss of coating patents in the early 1950s drove Mead to compete in printing papers with scale economies (Toivanen, 2004, p. 294). It reduced costs, closed the newly acquired Columbian Paper Company mills, and sold Manistique Pulp & Paper, as its specialty markets were discouraging. In the biggest mill, Chillicothe, Mead added a new paper machine. It also acquired the adjoining Chillicothe Paper Company, which produced high quality uncoated and specialty printing papers. Mead built two joint venture linerboard mills in Georgia in 1948 and 1954, thus tripling its paperboard capacity. They were organized under Georgia Kraft Company, 50% owned by Mead and 50% by Inland Container Corporation. Mead’s research and development activities developed carbonless paper, used e.g. as duplicating paper in business forms, and a pulping process for oak to replace the scarce chestnut raw material. Oak was abundantly a available near some of its paper and board mills. The tanning extract business withered. Mead’s joint venture subsidiaries bought 700,000 acres (280,000 hectares) of forestland in Michigan and Georgia. In the mid 1950’s Mead’s competitors were moving into paper box and container manufacture. The management pondered whether it would rather lose sales to competitors or lose old containerboard clients. To test the matter, in 1955 Mead acquired its first shipping container company, operating in Ohio and North Carolina (Whitaker, 1963, p. 22). Seeking the growth markets (1957-1981) In the late 1950’s, Mead started acquiring container, carton and box producers and white paper merchants. One of the first acquired packaging producers manufactured multi-unit packaging, beverage packaging, display stands and packaging systems, all of which soon became one of Mead’s core businesses. The packaging acquisitions stopped in 1965 when the Federal Trade Commission demanded Mead to divest 7 corrugated products plants and banned their further acquisitions until 1975. Then in 1970 the Justice Department demanded Mead to divest 23 merchant houses and banned their further merchant acquisitions until 1980. Organic growth continued, however. In 1957 Howard E. Whitaker became the chairman. Donald F. Morris became the next president (1957-1963) and he was followed by George H. Pringle (1964-

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1968) when D.F. Morris suddenly died. During these ten years, in the packaging sector Mead built its first bleached kraft paperboard machine with the Brunswick joint venture in 1962. With the Georgia Kraft joint venture it added a linerboard machine and a new kraft containerboard mill in 1966. Mead expanded to plastic packaging to offer a full line of service. In the commodity publication papers, Mead improved productivity, quality and cost control (Mead Annual Report, 1961), and built two white paper machines. The company moved into technical specialties, like filtration and decorative laminate papers, by acquiring the Hurlbut Paper Company and the Wrenn Paper Company in 1958, and to cotton fiber and watermarked papers by acquiring the Gilbert Paper Company in 1960. During the 1960s Mead acquired more decorative laminates and moved into photographic base material Internationalization began in 1960 when Mead opened its first foreign subsidiary in Switzerland to engage in sales and technology licensing. Quickly Mead was a participant in a Netherlands multiple-packaging company, and had shares in container and box plants in France, Lebanon, West Germany and Spain. It also was involved with an Italian paper-converting operation, in a Belgian offset and business paper mill, and in a Belgian tissue company, which was sold in 1968. Mead additionally expanded to Canada in 1961 when it gained a 29% interest in the Canadian company British Columbia Forest Products (BCFP), which produced lumber, plywood and newsprint through Brunswick Pulp and Paper’s ownership arrangements. Soon Mead formed another Canadian joint venture, the 50%-owned Northwood Pulp and Paper, to operate a sulphate pulp mill in British Columbia, with the Canadian mining company Noranda. Additionally Mead licensed its packaging system patents around the world. In the mid-1960s the company started showing interest towards more unrelated diversification. For some years Mead had used electronic data processing to gain efficiencies in company management. In 1964 Mead made its data processing and systems abilities available to outside clients. In 1966 the Mead Educational Products group was created to distribute and produce school supplies and stationery. It was created through acquisitions like Westab, maker of notebooks and stationary, and Sargent Art, producing crayons, water paints and modeling clay. Mead also expanded through acquisitions to disposable tableware, and fabric design and distribution. In 1968 J.W. McSwiney became Mead’s new CEO and chairman. The traditional cellulose business was kept as Mead’s basis, but the company intended to grow by moving into new markets (Mead Annual Report, 1968). The family-forming age group in need of housing, commodities, cars and education was seen as the source of growth. In the late 1960s Mead built a new lightweight coated paper machine and expanded its stationery business. Mead also took a great step to diversify into unrelated businesses. It acquired the Woodward Corporation, producer of pipes, iron castings, industrial rubber products, lime, cement and coal, with 12,000 employees. It also acquired a furnace company producing ferro-manganese and ferro-silicon for the steel and foundry industries and entered the furniture business. Additionally Mead acquired the Data Corporation, which specialized in computer systems, information storage and retrieval. For instance, Data Corporation assisted other companies in data-rich research, was developing a legal case search application in

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Ohio, and cashed in on its knowledge in optics and aerial color photography e.g. by making moon charts for NASA. Simultaneous growth in all these divisions was not easy in the inflation-prone 1970s. Mead focused on the ones which had the biggest growth potential and in which Mead had a strong position. It exited from large castings, lime and cement businesses, electric furnaces, furniture and fabrics, tableware, and the European white paper production. The school products distribution chain was divested and distribution was now handled through mass market retailers. Instead, the capacity was increased in rubber production, and small and medium-sized casting, mainly used in automotive parts. The Canadian joint ventures added some plywood, waferboard, sawmill and pulp capacity. The focus in printing papers was set on carbonless, coated offset and copy grades. The company started producing coated kraft paperboard and built a new totally owned corrugating medium mill, while it closed some small older paper and board machines. In 1977 Mead acquired Gulf Consolidated Services, a distributor of industrial construction and maintenance supplies, like pipes, fittings and electrical supplies. The LEXIS and NEXIS legal and news search services and a new color ink jet printer were developed. In 1980 Mead decided to further focus on forest products, distribution and digital products (Mead Annual Report, 1980). Mead launched a major expansion program in forest products, and added a white paper machine and a joint venture linerboard machine. At the end of the period Mead had 1.7 million acres (700,000 hectares) of forestland in the U.S. Return to forest products roots (1982-2001) and a merger In 1982 Burnell R. Roberts became the CEO and chairman when McSwiney retired. Steven C. Mason became the president. The early 1980s were difficult times, as the industry was hit by a recession. Also, Mead was under a $1.5 billion capacity expansion program, and it had to pay 45 million to settle a civil suit following the largest price-fixing suit in U.S. legal history, concerning price fixing in the box markets. Debts mounted and Roberts focused on costs and performance improvements. He followed McSwiney’s strategy and sold the industrial products, industrial distribution and inkjet printer business, while building a new lightweight coated paper machine and adding coated kraft board and pulp capacity. In the late 1980s Mead further emphasized the value-added products. E.g. in 1986 Mead acquired the Zellerbach Distribution Group, which more than doubled its distribution business and made it the largest paper distributor in the U.S. at the time. After that Mead grew its LEXIS/NEXIS business with several small acquisitions, and spent about $150 million to develop a new color printing technique involving paper sheets with photosensitive color coating. In the meantime, Mead reduced its exposure to commodity-oriented products and exited from most of its old forest products joint ventures, e.g. sold its share in the Canadian BCFP, sold its share in Brunswick Pulp & Paper, and dissolved the Georgia Kraft joint venture, receiving full ownership of a coated board mill in Alabama, but losing all its linerboard assets. Additionally half of Mead’s corrugated box plants were divested due to the limited paperboard supply. In the early 1990’s Mead added a 300,000 ton paper machine

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producing coated board and linerboard in Alabama, and finally discontinued the photosensitive papers due to their disappointing demand. In 1992 Steven C. Mason succeeded Roberts as the CEO and Chairman. Industry was again in a downturn and he launched a comprehensive performance improvement program. The LEXIS/NEXIS electronic publishing business was sold in 1994 for $1.5 billion to Reed Elsevier plc. Packaging converting facilities were added in Spain, Australia, Britain, Poland, Mexico, Brazil, Argentina, and Chile. In Alabama, Mead built a new lightweight corrugating medium machine, adding about 400,000 tons of capacity. In 1996 Mead acquired an integrated coated paper mill in Maine for $650 million. The deal included 490,000 tons of coated papers, some 110,000 tons of uncoated specialties and 667,000 acres (270,000 million hectares) of forest. In 1997 Mason retired and Jerome F. Tatar became the CEO and chairman. Tatar continued the performance enhancement program, which had been continuous since 1992. White paper prices declined further as newly-established Asian producers started importing to North America, due to weakening Asian markets (Mead Annual Report, 1998). In 1998-1999 Mead sold to International Paper its Zellerbach paper merchant and distribution business, which did not meet Mead’s earnings expectations (Mead 10-K, 1998), and divested d its 50% share in Northwood, the pulp, lumber and plywood joint venture in Canada. The proceeds were used to acquire AT-A-GLANCE group, the leading manufacturer of time management products, for $550 million. Mead also added decorative laminate papers in the U.S. and England, and established a school product subsidiary in Mexico. Mead wanted to position itself as a producer of high-quality low-cost coated papers, so it closed 6 uncoated fine paper machines and sold in 2001 the Gilbert Paper Company, producer of uncoated specialties e.g. currency, watermarked, and high quality communication papers. Some converting facilities were closed. In 2002 Mead merged with the Westvaco Corporation, another American company. The merger was treated as an acquisition of Mead by Westvaco, and Westvaco’s CEO, John A. Luke Jr., became the CEO and chairman of the new MeadWestvaco Corporation. The merger combined the companies’ coated paper and office products businesses. It also created a value-added packaging giant by combining Mead’s coated kraft board and multiple packaging systems for bottlers with Westvaco’s bleached paperboardd and high-end consumer packaging. Operations were streamlined by closing several small plants, and divesting Mead’s containerboard business and unnecessary forest assets. By 2003, the company had acquired two calendar producers, the leading Irish pharmaceutical packaging company, and established a consumer packaging joint venture in Moscow. In January 2005 MeadWestvaco announced the sale of the company’s paper business for $2.3 billion to the investment firm Cerberus Capital Management. In a way, this divestment puts the endpoint to the story of Mead, which began with the birth of the printing paper company in 1846. MeadWestvaco has several packaging converting plants around Europe, and also a couple in Brazil. The company serves the beverage, consumer products, healthcare, media and entertainment industries. All of the company’s major paperboard capacity is in the U.S., apart from two small containerboard mills in

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Brazil. The company has also inherited from Westvaco activated carbon and asphalt chemical businesses. The company has about 1.2 million acres (480,000 hectares) of forestland in the U.S., and 130,000 acres (53,000 hectares) in Brazil. MeadWestvaco says that in the future it intends to expand its higher margin packaging business by leveraging its strong positions in North America and Europe, and by penetrating the growth markets in Asia, Eastern Europe, and Latin America (MeadWestvaco press release, 2005). 2.3 Weyerhaeuser 2.3.1 Introduction Weyerhaeuser has been known as one off largest American forest industry companies. It has also been known for its dedication to timberland ownership, and its focus in the upstream forest industry businesses of building products and market pulp. This is also visible in its paper sector, where most of its production capacity is in uncoated fine papers; and in the packaging business, where Weyerhaeuser concentrates on corrugated packaging. Neither of these is a very highly value-added business and could be seen as an extension of its raw material sources, designed to utilize them to the fullest. Weyerhaeuser’s product portfolio has remained surprisingly stable over the years, especially from the 1960s onwards, as seen in Table 4.4. There has been some movement toward value-added business, like the “Other” section of Table 4.4, which in 2003 included engineered wood products and recycling business, while in the 1950s it included simpler things like bark products. The company has not experienced any great strategic turnarounds or grand diversification experiments. Its headquarters is still located in the same neighbourhood as in 1900, and until 1998 the family was actively involved in the top management. The company started deploying huge acquisitions only after 1998. All of its big paper and pulp mills are located in North America (Weyerhaeuser 10K, 2003). Due to its location in the West, its most important export partner outside North America has traditionally been Japan. Table 4.4.

Development of Weyerhaeuser’s product portfolio as percentage of net sales.

Lumber, chips, timber Plywood, veneer, panels Pulp, paper, packaging WRECO Other Total

1940 1955 1965 1975 1985 1995 2003 67 57 25 38 25 25 24 1 6 14 13 14 11 12 16 31 51 42 36 45 39 0 0 0 6 13 8 10 16 7 10 2 11 11 15 100 100 100 100 100 100 100

Average 37 10 37 5 10 100

Source: Weyerhaeuser Annual Reports. WRECO = Weyerhaeuser Real Estate Company, residential and housing development, since 1970. In 1940 and 1955 pulp is included with paperboard.

This text discusses Weyerhaeuser’s development in four parts. In (1900-1945) the company started as a timberland owner in the Pacific Northwest. Then it expanded

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into sawmilling and retail and wholesale lumber yards, and finally, into pulp and plywood production. In the second period (1946-1956) its production grew. In the third period (1957-1980) Weyerhaeuser integrated forward into container, box and carton converting, moved to the South, and expanded to Canada and other countries. It also moved into fine paper and newsprint, and diversified into residential development, banking and some more exotic businesses, like salmon ranching. The fourth period (1981-2003-present) brought cost control and focusing. From 1998 onwards, the company started making big acquisitions and relied less on organic development. 2.3.2 The early years (1900-1945) The Weyerhaeuser Timber Company was incorporated in January 18th 1900 in Tacoma, Washington. The company was a joint venture between 16 Midwestern investors, who joined to purchase 900,000 acres (360,000 hectares) of timberland in the State of Washington from the Northern Pacific Railway. Frederick Weyerhaeuser was the key organizer, although the associates were already familiar from other investments. Actually, The Weyerhaeuser Timber Company was only one of 48 forest industry companies that the Weyerhaeuser family owned an interest in between 1900-1914. These companies were located along the Mississippi River and its tributaries, in the South, Idaho and Pacific Northwest (Hidy, Hill, & Nevins, 1963, p. 588). Potlatch Forests and Boise Cascade Corporation were included in this portfolio. The investor group believed in partnerships and decentralization, so the companies were kept separate. Sometimes even the sawmills of a single company competed with one another (Sensel, 1999, p. 43). At the time, the Weyerhaeuser land deal was the largest private land transaction in American history. Even though the Pacific Northwest held some of the largest remaining virgin forests in the U.S., the deal was considered exceedingly speculative because lumbering in that area was still in a primitive stage, fire hazard was great, coastal lumber mills seldom paid well and overproduction was a constant problem. Also, delivering the lumber to the big eastern markets was economically infeasible, some local timber like hemlock was considered commercially worthless, and “nobody even exactly knew what timber the tract held.” (Hidy, Hill, & Nevins, 1963, p. 213). Fire hazards were emphasized by the massive Yacolt Burn of 1902. Weyerhaeuser started strongly lobbying for forest fire protection and against the high property taxes that penalized regrowing timber as a crop. Fire protection was improved by new state laws and the founding of the Washington Fire Association by the local timber owners, but it took until 1934 for Washington and Oregon to amend their land tax laws. Initially the company focused on growing and consolidating its land holdings while the prices still were affordable. Itt expanded to Oregon and Northern California timberlands; by 1914 it owned about 2 million acres (800,000 hectares). For income, Weyerhaeuser sold small logging rights to local sawmills, partly to keep up positive relationships. In 1902 it acquired its first sawmill in Everett, Washington. The mill was very small, but included a good deepwater harbor. The mill’s purpose was to

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gain experience in activities like the appraisal of Douglas fir, manufacturing and markets. The harbor was important, as the markets were mostly in California, and 10% of the lumber was exported (Hidy, Hill, & Nevins, 1963, p. 233). The mill bought its timber from the open markets before WWI, because it was cheaper than to do its own logging. In 1915 Weyerhaeuser made its first real move into manufacturing by building its second sawmill, and soon in 1917 a third sawmill as a local joint venture. The added capacity needed outlets and the company bought a retail chain in the Dakotas, which was reachable within rail freight cost limitations. Additionally Weyerhaeuser and its associated companies in Idaho and the upper Midwest formed a joint marketing arm, Weyerhaeuser Sales Company, in 1916, which sold to independent retailers. A third outlet came when the opening of the Panama Canal to commercial traffic after WWI reduced transportation costs and enabled the company to open wholesale distribution yards in the East. As a byproduct Weyerhaeuser moved into merchant shipping. 5 more sawmills were built in the Northwest in 1928-1929. One of them expanded the production portfolio to Ponderosa pine. As production grew, waste utilization gained importance. In the 1930s Weyerhaeuser started turning sawmill waste into Pres-to-Log fuel and log leftovers to wooden boxes. In 1931 the company built its first pulp mill in Longview, Washington to utilize its hemlock reserves. The pulp mill specialized in high quality bleached sulphite pulp, and proved a success even in the midst of the Great Depression. A second pulp mill was built in 1936. Another success in the depression was the 1928 introduction of 4-Square trademarked branded lumber. The next product expansion came in 1940 when Weyerhaeuser acquired 51% of Washington Veneer Company to learn the plywood business. In 1941 Weyerhaeuser established the Clemons Tree Farm, the nation’s first certified tree farm, which served as a laboratory of forest renewal and work practices, and fulfilled the company’s longstanding dream to grow timber as a crop. More tree farms were established in the following years. In WWII the company took the industry lead in supplying aircraft materials and nitrating pulp for munitions. During the first period, the founder, Frederick Weyerhaeuser, was the president until his death in 1914. His son John Philip was the president from 1915-1927. After him came F.S. Bell, a member of another founding family. In 1934-1945, the president was Frederick E. Weyerhaeuser, another son of Frederick’s. 2.3.3 The first steps of diversification (1946-1956) After the war John Philip Weyerhaeuser Jr., J.P. Weyerhaeuser’s son, became the president. The company set a new objective to gain greater operating efficiency through the integration of forest management, research, logging, sawmilling and pulp operations. Consequently, Weyerhaeuser Timber Company absorbed some joint venture sawmills and affiliate companies, e.g. the Sales Company, which already gained 70 percent of its income from selling Weyerhaeuser lumber (Hidy, Hill, & Nevins, 1963, p. 484, p. 559). In 1947 the company built a new Douglas fir plywood mill and sold its interest in Washington Veneer to Georgia-Pacific Plywood & Lumber Company. Some

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lumbermills were added, one of which was especially built to serve export markets. Post-war pulp markets were also promising. As plastics and rayon producers were interested in the company’s existing sulphite pulp production, Weyerhaeuser built three new pulp mills, which produced bleached and unbleached kraft pulp. This was made possible by their innovation to turn n Douglas fir into bleached pulp. Bleached board and containerboard machines were added to the pulp mills. The company expanded to paper production in 1956 through building a small joint venture mill which produced glassine and grease-proof papers. Other ways to utilize existing resources were also found, e.g. the company started making bark products, entered particleboard production, and started making hardboard from white fir, which had previously had little value. In 1954 the management decided to start producing chemicals like chlorine and caustic soda for its own use. In 1956 Weyerhaeuser started its expansion outside the Northwest by acquiring 80,000 acres (32,000 hectares) of timberland in Mississippi and Alabama. Then it acquired the Kieckhefer Container Company and its affiliate, the Eddy Paper Corporation, its former clients. The deal included three paper mills located in North Carolina, Michigan and New Jersey, shipping container, milk carton and folding carton plants in 20 states and 400,000 acres (162,000 hectares) of forestland in North Carolina (Weyerhaeuser Annual Report, 1957). This action was Weyerhaeuser’s first manufacturing expansion outside the Northwest, its first step into the conversion business, and the beginning of growth acquisitions. The deal was finished in 1957, after J.P.W. Jr.’s death (Weyerhaeuser, 1989, p. 33). 2.3.4 Growth and expansion (1957-1980) Frederick K. Weyerhaeuser, J.P.W. Jr.’s older brother, became the president in 1957. In his era, Weyerhaeuser opened a sulphite pulp mill, increased plywood capacity, and added some converting plants. Many retail lumber yards were sold, and the company’s first overseas marketing subsidiary, Weyerhaeuser International, was formed. In 1959 the company name was changed to the Weyerhaeuser Company, as the name no longer described the full scope of Weyerhaeuser’s manufacturing activities. A new logo was created. In 1958 the company owned about 3.4 million acres (1.4 million hectares) in the U.S. After F.K.W.’s retirement in 1960, Norton Clapp, a grandson of another of the founding investors, became the president. Clapp added paperboard production and built more converting facilities, the focus being on shipping containers. The packaging business turned international through shipping container plant acquisitions in Belgium, France, Germany, Venezuela, Guatemala, the Caribbean and South Africa. The European container investments were primarily done to learn the market and thus increase linerboard exports over time (Weyerhaeuser, 1989, p. 36). Log exports to Japan and the Far East increased in 1962 after the Columbus Day storm flooded the U.S. lumber markets. Weyerhaeuser’s first overseas marketing office was opened in 1963 in Japan, and its second in 1964 in France. The company acquired an Australian building products distribution company in 1965. In Canada, it built a joint venture bleached kraft f pulp mill in 1964 with local partners, and acquired timberland, panel and sawmill assets. In the U.S. Weyerhaeuser moved

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to hardwood products, and added particleboard. It also acquired two fine paper producers and its major pulp clients, Hamilton Paper Company and Crocker, Burbank & Co, greatly expanding its position in that business. Weyerhaeuser was listed in 1963. Forest utilization was increased by e.g. examining for possible mineral values (Weyerhaeuser Annual Report, 1965). Clapp retired in 1966 and George H. Weyerhaeuser, J.P.W. Jr.’s son, was elected as the President and the CEO. G.H.W. stepped up the company’s acquisition growth pace, but also continued the traditions off organic growth. A High Yield Forest program was adopted, which doubled the company’s wood growth rates. In the U.S. the company added container plants, particleboard, plywood and sawmills. The first Southern sawmill was acquired in 1966 and the first Southern pine plywood plant built in 1967. Over 2 million acres (800,000 hectares) were acquired in the South, primarily through the 325 million dollar Dierks Forests acquisition in 1969, which included a paper mill, gypsum mine and plant, wood products facilities and signified Weyerhaeuser’s entry into multiwall sacks and grocery bags. In Canada the company gained the full ownership of its assets and increased market pulp capacity. International packaging expansion continued in France, Belgium and Greece. In Indonesia, the Philippines and Malaysia Weyerhaeuser acquired logging rights to 1.5 million acres (600,000 hectares) to supply local Asian markets. In the 1960s and 1970s Weyerhaeuser additionally grew by diversification. In 1966 the company had already developed a piece of uneconomic forestland into a ski resort. In 1969 it moved further into mortgage banking and residential development, first in the West, then in North Carolina, New Jersey, Florida and Texas. In 1976 it moved into the garden supply and nursery business, supplying both indoor and outdoor ornamental plants in addition to its traditional nursery-grown trees. In the 1970s it entered the salmon ranching business to take advantage of warm mill effluents and its existing knowledge capital in water ecosystems. The company also started moving strongly into using and gathering recycled materials and began to export linerboard to China as the first western paper company. Weyerhaeuser entered the newsprint business by establishing a NORPAC (North Pacific Paper Corporation) joint venture in Washington State with the Japanese company Jujo Paper, later named Nippon Paper Industries. The newsprint mill started in 1979. Fluff pulp production was increased and Weyerhaeuser integrated forward to the production of private label disposable diapers, in which it soon became the nation’s largest supplier. In the late 1970s Weyerhaeuser decided to serve its international containerboard customers through U.S. exports and divested its foreign assets (Sensel, 1999, p. 99). The Southeast Asia harvesting operations were seen as environmentally and business-ethically risky (Sensel, 1999, p. 21) and also those assets were divested. Weyerhaeuser’s mills in the Pacific Northwest again had to rely on Western markets and exports, because the intercoastal transportation costs by rail or ship had become unfeasibly high.

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2.3.5 Increasing focus and cost control (1981-2003) In the early 1980s mortgage rates increased and the construction industry slumped. Mount St. Helens erupted and salvation logging operation on 68,000 acres (28,000 hectares) was begun. At the same time the company was building its first oriented strand board mill, its first coated fine paper mill, its second newsprint machine and a big linerboard machine. Costs had to be cut. Additionally, the company said that the oversupplied environment of the 1980s made it emphasize Total Quality, reliability and customer service, instead of output like it did in the 1970s (Weyerhaeuser Annual Report, 1987). The company received consultation on its Total Quality effort from its Japanese partners. The consequence was an organization redesign, which identified overlaps and flattened the organization. Workforce and expenditures were reduced by 25 percent before 1983. Between 1980 and 1985 about 9000 people left Weyerhaeuser (Weyerhaeuser Annual Reports, employee data). In the early 1980s real-estate, financial services and diversified businesses had provided about 30-50% of the company’s earnings (Weyerhaeuser, 1989, p. 52). This made the company move through acquisitions further into the annuities and savings and loan business, turn itself into the nation’s largest nursery stock supplier, and start producing hydroponically-grown lettuce. Kraft paper, multiwall bags and Douglas fir plywood were exited, while it added building products plants, corrugated box plants and a market pulp mill in the U.S., and pulp, paper and sawmilling capacity in Canada. Internationally, the company opened an office in Peking in 1984 and listed in the Tokyo Stock Exchange in 1986. In 1988 G.H.W became the first Weyerhaeuser CEO to serve at the same time as the Chairman of the Board. In 1992 John W. Creighton followed him as the CEO, but G.H.W. continued as the chairman. Creighton was the first CEO not related to the original investors. In 1989 the senior management noticed the company’s financial performance lagged behind its competitors, and decided to focus on the company’s core businesses in which it could excel both in quality and cost. This lead Weyerhaeuser to divest its hydroponic food and salmon businesses, gypsum production, milk cartons, hardwood paneling, and garden supplies. It also sold its pine lands in the west and exited the insurance and banking businesses and home construction business, and scaled down its residential development business. At first Weyerhaeuser decided to move into the branded diaper markets, but process difficulties, inexperience in consumer marketing and the opinions of important fluff pulp customers made the company additionally divest its diaper business (Sensel, 1999, p. 104). More than 10,000 people left Weyerhaeuser’s employ between 19881993 (Sensel, 1999, p. 37). In the 1990s Weyerhaeuser’s growth was relatively small scale. It grew in North America by adding two oriented strand board plants, a third newspaper machine, and some recycling facilities; and acquired some container plants, a couple of pulp mills, and Southern timberland. Internationally Weyerhaeuser expanded through joint ventures, e.g. it created a joint venture investment fund to buy timberlands in the Southern hemisphere, created a joint venture with SCA to build two packaging

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plants in China to serve the international needs of existing customers and acquired half of a timberland joint venture in New Zealand. In 1998, Steven Rogel became the CEO, and subsequently in 1999 also the chairman of the board. Before this he had been the president and CEO of Willamette Industries. Weyerhaeuser’s new strategy was to grow by making big acquisitions, instead of building capacity (Weyerhaeuser Annual Report, 1999; Sensel, 1999, p. 177). Capital spending was kept low, and streamlining continued. Rogel started by acquiring a fine paper mill including related assets in Canada for $543 million dollars. He also invested in Uruguay forest plantations. In 1999 Weyerhaeuser acquired MacMillan Bloedel, one of Canada’s largest forest product companies, for 2.3 billion dollars. The deal included 19 corrugated packaging facilities, 3 containerboard mills, 11 sawmills, 6 oriented strand board, plywood and particleboard plants, 31 building material distribution centers and about 6 million acres (2.4 million hectares) of timberland in Canada and 428,000 acres (170,000 hectares) in the U.S. The acquisition contained approximately 795 million dollars worth of goodwill. The acquisition brought 49% of Trus Joist International, the rest of which was soon bought, making Weyerhaeuser the leader in engineered wood products. Next, the company closed many unnecessary facilities and bought some Australian sawmills and timberland. In 2002 Weyerhaeuser made its largest acquisition when it acquired Willamette Industries for 8.1 billion dollars, including 2 billion of goodwill costs. The deal included building materials, fine paper, corrugated packaging and grocery bag plants, mostly in the U.S., but also a few in Mexico and Europe. Afterwards several facilities were closed and some 0.5 million acres (200,000 hectares) of timberland in the U.S. was sold. Weyerhaeuser produces lumber, plywood, engineered lumber, market pulp, uncoated fine paper, containerboard and packaging, some magazine paper and newsprint, and does residential development and paper recycling. In 2003 Weyerhaeuser had about 6.8 million acres (2.8 million hectares) in the U.S., 30 million acres (12 million hectares) in Canada, and interest in circa 580,000 acres (230,000 hectares) in joint ventures in New Zealand, Uruguay and Australia. In the future Weyerhaeuser says it aims for more synergy benefits and its international growth focus will be on the Southern Hemisphere (Weyerhaeuser Annual Report, 2003). 3 CASE COMPANY COMPARISONS 3.1 Financial comparisons This section compares some of the companies’ financial figures. All the numbers presented in this section are counted in 2003 dollars. In addition to Georgia-Pacific, Mead and Weyerhaeuser, also International Paper is included. International Paper has long been the most prominent paper company in the U.S. and in the world, and gives a good reference point to the financial data. Additionally the cyclical behavior is outlined better with more companies. All of these companies have been involved with forest ownership, building products, market pulp, paperboard and packaging production, and printing and writing papers and tissue, although their product mix

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and strategic focus has varied. All of them have had unrelated business ventures, especially in the 1960s and 1970s. All have also been engaged with distribution of one sort or another, e.g. building products or paper. The surprising thing is that despite their differences, their financial developments have been relatively similar, which implies a strong environmental influence. 35000 30000 25000 20000 15000 10000 5000

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Georgia-Pacific

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Source: Annual Reports of Georgia-Pacific, Mead and Weyerhaeuser. Lamberg, in this volume.

Figure 4.1. Net sales. (Million dollars, in 2003 money). Georgia-Pacific, International Paper, Mead, and Weyerhaeuser. 1940-2003.

Figure 4.1 shows that the companies’ growth has been relatively smooth until the 1970s, but Weyerhaeuser and Georgia-Pacific have clearly grown faster than International Paper and Mead. Especially Georgia-Pacific has been a fast grower, since in the early 1940s its sales were 31 million dollars compared to Weyerhaeuser’s 736 million dollars. Yet by the early 1970s the companies were the same size, showing why Georgia-Pacific’s acquisition growth strategy has been called aggressive. Mead grew with the others, but dropped from the growth pace in the 1970s. This may have had something to do with its focus shifting in the 1970s from the forest products business to other areas, like metal castings. Considering Mead’s slow growth pace after the 1970s, it is not so surprising that it ended up in a merger, while the others kept independent. In Figure 4.1, between the 1960s and the late 1980s also International Paper’s growth has lagged from its peers. It has regained its leading position lately by making some very big acquisitions, like Federal Paper Board in 1996, Union Camp in 1999, and Champion in 2000. The biggest acquisitions of Georgia-Pacific were Great Northern Nekoosa in 1990, Chesapeake Corp.’s away-from-home business in 1999, and Fort James in 2000. Weyerhaeuser’s greatest acquisitions were

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MacMillan Bloedel in 1999 and Willamette in 2002. All of these can be seen as abnormal peaks in the picture. Mead made no huge acquisitions, but in 2002 Mead merged with Westvaco. It would be tempting to conclude that the big companies have an incentive to grow at the speed of their peers, or risk being taken over by them. International Paper has a special incentive to stay at the top as its position has granted it a place in stock indexes like Standard & Poor’s, and thus in big investor’s stock portfolios. Falling from the index would make the investors sell. In Mead’s line the bulge between 1986 and 1998 is mostly due to its Zellerbach paper distribution business, which was sold as unprofitable. This displays one dilemma often connected with paper distribution businesses – they generate sales, but are sometimes difficult to run profitably. 1500 1000 500 0 -500 -1000 -1500 1940

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Source: Annual Reports of Georgia-Pacific, Mead and Weyerhaeuser. Lamberg, in this volume.

Figure 4.2. Net Income. (Million dollars, in 2003 money). Georgia-Pacific, Mead, Weyerhaeuser and International Paper. 1940-2003.

Before the 1940’s the companies’ incomes were mostly small and fluctuated due to depression and war. Figure 4.2 shows how the companies faced their first growth spurt from the mid-1940s to the 1960s. During the first period the companies’ size differences were clear. The next period, from the early 1960s to 1979, increased the growth pace. The difference was mostly due to the growing economy, and larger a number of acquisitions in the latter period. Especially the building products businesses flourished as the baby boomers needed houses and offices. In 1980 the seemingly eternal growth abruptly ended and the companies entered into a cyclical period which still continues today. In the last period the companies’ income is no longer directly related to its amount of sales. In fact it seems that the big companies have not benefited much from their recent huge sales growth. These four periods are

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so sharply different that it is the main reason why the company histories are divided into four periods throughout this article. Figure 4.2 indicates that in the current cyclical business, the benefit of big sales is mostly the better income growth leverage they provide at the peak years. In this kind of environment, cost competitiveness is most essential. The companies can no longer count on “business as usual,” and must be able to weather a few bad years in order to survive. Small companies may find it more difficult, as they have fewer reserves and cannot as readily take downtime at their mills. Diesen says (1998, p. 14) that the main reasons behind the cycles are the volatility of supply and demand and inventory speculation of customers. He also says economic fluctuations are a lesser factor. Nevertheless, in Figure 4.2 at least the timing of the peaks and valleys does match with the development of the U.S. GDP. Figure 4.2 also shows that the downcycle of the early 2000s was the worst the companies have experienced since the 1940s. Now many forest products companies say they want to exit the cyclical commodity business toward more value-added products. This is a very old phenomenon. The problem is that the value-added products of today keep turning into the mature commodity products of tomorrow. For example, plywood was called value-added in the 1940s, but today it is a basic commodity product. The investments in Figure 4.3 include the companies’ capital expenditure and acquisitions. The main period of investment growth seems to have ended with the depression of the early 1980s, as soon as the ongoing projects were finished. However, this is partly an illusion, because the change in income growth seen in Figure 4.2 also affected the investments. In 1965-2003 the companies’ investment rates have varied around 200% of their income. The high peaks in Figure 4.3 signify big acquisitions. The companies started acquiring their peers only in the 1990s. One reason for the recent huge acquisitions is that product demand in the U.S. no longer grows as fast as it did in the 1960s and 1970s. Acquiring capacity increases companies’ market shares but does not add industry capacity, which is a good move in an overcapacity-ridden industry. The investment data in Figure 4.3 enforces the idea that Mead and International Paper have lagged behind the others. Mead’s investment levels rose to match the others in the 1980s, but International Paper did not reach them until the 1990s. Despite its immobility, International Paper has long been in a better position than the others to make big acquisitions, as they represent a smaller share of its huge sales and are thus less risky. In general, the big acquisitions lower the companies’ investment and cyclicality risks by creating stronger balance sheets (Diesen, 1998, p. 95).

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52

19

19

48

44

19

19

19

40

0

IP

45 40 35 30 25 20 15 10 5

W

00

96

20

92

19

88

19

84

M

19

80

19

76

19

72

19

19

68

64 GP

19

60

19

56

19

52

19

19

48

44

19

19

19

40

0

IP

Source: Annual Reports of Georgia-Pacific, Mead and Weyerhaeuser. Lamberg, in this volume.

Figure 4.3. Investments. (Million dollars, in 2003 money) and Investments/Sales (%). Georgia-Pacific, Mead, Weyerhaeuser and International Paper. 1940-2003.

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3.50 3.00 2.50 2.00 1.50 1.00

GP

00

96

20

92

19

88

19

84

W

19

80

19

76

19

72

19

68

19

19

64

60

19

56

19

52

19

48

19

44

19

19

19

40

0.50

M

120 100 80 60 40 20

W

00

96

20

92

19

88

19

84

M

19

80

19

76

19

72

19

68

19

64 GP

19

60

19

56

19

52

19

48

19

44

19

19

19

40

0

IP

Source: Annual Reports of Georgia-Pacific, International Paper, Mead and Weyerhaeuser. International Paper’s equity data was unavailable.

Figure 4.4. Debt ratios. (Long term debt/equity, and below, Long term debt/Sales). GeorgiaPacific, Mead, Weyerhaeuser and International Paper. 1940-2003.

Figure 4.4 shows that the case companies have had different ways to use debt financing. Mead has been very careful not to take too much debt, and has only temporarily resorted to it during the worst downcycles. Weyerhaeuser did not take any debt until George H. Weyerhaeuser became the president in 1966 and started intensively growing the company through acquisitions. And even then

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Weyerhaeuser kept its debt burden relatively low until the mid-1980s. GeorgiaPacific, on the other hand, has taken plenty of debt financing. Debt was important especially in Georgia-Pacific’s early years, as the small company could not finance its fast growth alone. However, still in the 1990s the company’s debt to equity ratio has been quite high. International Paper’s debt financing has followed the general trends. In 2003 dollar terms, the debt burdens of Georgia-Pacific, International Paper and Weyerhaeuser have naturally increased. In the mid 1970s each of them had around 3 billion dollars of debt; in the mid-1990s each had around 5 billion dollars of debt; and in the early 2000s their debts peaked at around 13 billion dollars. While this rise is not reflected in Figure 4.4, it is still significant, as the incomes have not been growing at the same pace.

30 24 18 12 6 0 1940

1950

1960

Georgi g a-Pacifi fc Weyerhaeuser

1970

1980

1990

2000

Mead International Paper

Source: Annual Reports of Georgia-Pacific, Mead and Weyerhaeuser. Lamberg, in this volume.

Figure 4.5. Capital turnover in months. (12*Total assets/sales). Georgia-Pacific, r Mead, Weyerhaeuser and International Paper. 1940-2003.

Figure 4.5 shows that the capital turnovers initially improved, and then were relatively stable through 1960-1980, but seem to have been worsening since. Currently the cycle takes over a year to complete. Partly the recent worsening is due to bad years that temporarily affect the companies’ sales, e.g. through lower demand and production curtailments. Also, the huge acquisitions after 1990 seem to have created peaks in Figure 4.5. It is likely to take time until such merged companies run smoothly. Also the big acquisitions inevitably bring some less efficient assets, especially since often companies are sold to others precisely because they have been perceived as less successful and unproductive.

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Figure 4.5 tells us that Mead and International Paper, the most mature and paper oriented companies, were originally the most capital efficient companies. International Paper’s line displays nicely how its capital efficiency constantly worsened between 1950-1985 when it made only a few investments. Mead was run efficiently until the early 1990s, after which capital turnover seems to have lost its importance. Weyerhaeuser’s capital turnover worsened in the late 1980s, partly due to moves outside manufacturing into nurseries, banking and construction. Weyerhaeuser’s streamlining effort in the early 1990s was highly successful, and its necessity was undeniable. Georgia-Pacific has been an efficient capital user since the 1970s compared to the others, especially considering its continuous growth. In the 1950s and 1960s Georgia-Pacific made relatively many capital intensive investments, which seem to have taken time to generate sales. Such investments are common in the forest industry, as it takes time to build the plants until they start generating cash. Figure 4.5 shows the case companies have been relatively efficient capital users, considering the fact that they have had significant amounts of timberland bound to their assets. Still, the companies’ timberlandd exposure is not similar, and e.g. Mead has had only about 1/4 of the others’ timberland assets. In the new millennium the situation has become more uneven, as Weyerhaeuser and International Paper still own plenty of timberland, Mead has reduced its ownership, and Georgia-Pacific has divested all its timberland. 40% 30% 20% 10% 0% -10% 1940

1950

1960

1970

1980

1990

Georgia-Pacifi fc

Mead

Weyerhaeuser

International Paper

2000

Source: Annual Reports of Georgia-Pacific, Mead and Weyerhaeuser. Lamberg, in this volume.

Figure 4.6. Return on Invested Capital. (income+taxes/total a assets). Georgia-Pacific, Mead, Weyerhaeuser and International Paper. 1940-2003.

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Figure 4.6 shows how similar the companies’ development has been from an investor’s point of view. Like in the incomes in Figure 4.2 between 1940-1960, the companies generated ROI according to their size. Then, from 1960-1980, ROI development was more stable, After 1980 ROI turned more cyclical, and the companies had some very bad years. Compared to its bigger peers, Mead fared surprisingly well during this period, especially in the good years. Obviously, size does not guarantee better investment returns. The most striking thing is the constant decrease in ROI since the early 1950s, despite the companies’ strategic differences. The downward trend has been most obvious since 1980. If this trend continues, within ten years the companies might be producing constant losses. It is interesting to compare the case companies’ development since the 1980s with some of their large European peers (Näsi, Lamberg, Ojala, & Sajasalo, 2001, p. 141, p. 138). The ROIs of Enso, UPM and Metsäliitto have been fluctuating around 10%, and have peaked at 15-20%, which is about 5% better than their American counterparts, and with no clear diminishing trend. At the same time, investment/sales % of the Finnish companies’ has varied between 10-20%, while the American companies’ investments have usually been below 10% of sales. Investments in new machines have been found to contribute to higher ROIs in the paper industry (Artto, 2001, p. 53). The Finnish companies have heavily invested in big new paper machines, while the American companies generally have older and smaller machines. It is true that in the recession years big machines are at a disadvantage due to their high fixed costs, if they run underutilized. However, big machines with better scale economies improve the companies’ competitiveness especially in the boom years, when most of the money in a cyclical business is made. Acquisitions do not help with asset quality or scale economies. Lack of investments (see Figure 4.3) might also explain why International Paper’s ROI dropped the most during 1950-1970. Figure 4.7 indicates that in the 1950s and 1960s the business focus was more in growing the business than in productivity improvements. This changed in the 1970s and 1980s as inflation and the first waves of cyclicality were damaging the business. In the 1990s, the companies have grown through huge acquisitions, while productivity improvements have been somewhat reduced. However, also the three severe downcycles of 1991, 1997 and 2003 make productivity improvements seem smaller than before the 1990s. The sharp peaks in the picture tell that often after big acquisitions, the companies have laid off many employees. Also the divestments of non-core businesses in the early 1980s are visible. In 2003 one employee brought about 350,000 dollars worth of sales to these companies. Generally, the companies’ productivity numbers in Figure 4.7 have improved in lockstep. Surprisingly, also Mead’s productivity has improved at the general pace, even if its sales and employment figures have been very stable from 1980 to 2000. An exception to the rule is International Paper. Its employment figures grew far slower than the others’ before 1970, which indicates that it was a larger company to begin with, but was also less growth-oriented than the others. Then, from the mid1980s since it started growing through big acquisitions, International Paper’s productivity improvements have lagged behind the others, which indicates IP has been slow to seek acquisition synergies through layoffs.

96

ANNA AHOLA 120000 110000 100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 1940

1950

1960 W

1970

1980

GP

1990

M ead

2000

IP

0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05

W

00

96

20

92

19

88

19

84

M

19

80

19

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72

19

68

19

64

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19

60

19

56

19

52

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19

40

0.00

IP

Source: Annual Reports of Georgia-Pacific, Mead and Weyerhaeuser. Lamberg, in this volume.

Figure 4.7. Employees and employee productivity (Sales in million dollars in 2003 money/ employee). Georgia-Pacific, Mead, Weyerhaeuser and International Paper. 1940-2003.

3.2 Strategic comparisons Table 4.5 concludes the four evolution periods found in the case companies’ strategic behavior. The periods coincide strongly; thus we can conclude that the external environment has driven the companies’ strategic choices. Still there are

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interesting differences, like the fact that it took varying amounts of time for the downcycle of 1980-1982 to trigger changes in the case companies’ strategic behavior. Table 4.5.

The companies’ evolutionary periods. Georgia-Pacific, Mead and Weyerhaeuser.

Period 1 Period 2

Georgia-Pacific 1927-1946 1947-1959

Mead 1846-1945 1946-1956

Weyerhaeuser 1900-1945 1946-1956

Period 3

1960-1982

1957-1981

1957-1980

Period 4

1983-2003

1982-2003

1981-2003

Table 4.6.

P1 P2 P3 P4 Total

Initial growth Production-oriented, faster growth Expanding downstream in the value chain, unrelated growth Focus and streamlining

Number of actions per period, average annual number of actions (actions/years in a period), and the share of joint ventures t per period. Georgia-Pacific, Mead and Weyerhaeuser.

Georgia-Pacific No. of Actions Share of actions /a JV’s (%) 20 1 5 49 3.8 2 282 12.3 1 140 6.7 2 491 6.4

Mead Weyerhaeuser No. of Actions Share of No. of Actions Share of actions /a /a JV’s (%) JV’s (%) actions 42 0.4 12 56 1.2 13 24 2.2 46 36 3.3 3 215 8.6 19 179 7.5 4 110 5 6 155 6.7 13 391 3.9 426 4.1

Source: Action data collected from Annual Reports of Georgia-Pacific, Mead and Weyerhaeuser.

Table 4.6 shows differences in the companies’ strategic activity per period. The fastest growing company, Georgia-Pacific, has clearly made the greatest number of actions, while the slowest growing company, Mead, has made the least. Mead was more active in the third period, but mostly due to unrelated diversification. In the fourth period it could not match the others’ activity rate. Mead has traditionally made more joint ventures than the other two companies. If the actions in Table 4.6 were divided into decades, we would see that initially the companies made few actions. The activity t increased and reached its peak in the 1960s, after which it again has subsided. However, as growth per se has not subsided, this implies that the companies nowadays buy asset bundles, like large competitors, rather than small competitors or individual plants, as they often did in the 1960s.

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Table 4.7.

Georgia-Pacific’s strategic actions in the value chain. Percentage of strategic actions per period.

1. Raw materials (timberland etc.) 2. Sawmills 3. Pulp (mechanical and chemical) 4. Paper 5. Paperboard 6. Panel, plywood, veneer 7. Paper and board converting 8. Marketing and distribution 9. Other related 10. Multiple categories 11. Unrelated business Total

Period 1 Period 2 Period 3 Period 4 0 16 7 6 60 10 22 14 0 0 3 2 0 0 4 9 0 0 1 2 0 22 19 17 0 0 11 6 40 24 7 6 0 6 1 1 0 16 5 13 0 4 21 25 100 100 100 100

Average 7 27 1 3 1 15 4 19 2 9 13

Source: Annual Reports of Georgia-Pacific, Mead and Weyerhaeuser.

Table 4.8.

Mead’s strategic actions in the value chain. Percentage of strategic actions per period.

1. Raw materials (timberland etc.) 2. Sawmills 3. Pulp (mechanical and chemical) 4. Paper 5. Paperboard 6. Panel, plywood, veneer 7. Paper and board converting 8. Marketing and distribution 9. Other related 10. Multiple categories 11. Unrelated business Total Source: Annual Reports of Mead.

Period 1 Period 2 Period 3 Period 4 2 25 2 5 0 0 5 2 12 4 2 4 5 13 10 12 40 21 5 5 0 0 2 1 0 8 32 37 2 8 12 3 5 8 2 5 26 8 8 7 7 4 20 21 100 100 100 100

Average 9 2 6 10 18 1 19 6 5 12 13

GEORGIA-P PACIFIC C, MEAD AND WEYERHAEUSER Table 4.9.

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Weyerhaeuser’s strategic actions in the value chain. Percentage of strategic actions per period.

1. Raw materials (timberland etc.) 2. Sawmills 3. Pulp (mechanical and chemical) 4. Paper 5. Paperboard 6. Panel, plywood, veneer 7. Paper and board converting 8. Marketing and distribution 9. Other related 10. Multiple categories 11. Unrelated business Total

Period 1 Period 2 Period 3 Period 4 34 11 5 12 18 19 9 17 4 6 6 2 0 6 7 6 0 6 3 8 2 14 12 11 0 0 25 14 18 14 11 4 18 17 7 1 2 6 6 8 5 3 9 18 100 100 100 100

Average 16 16 5 5 4 10 10 12 11 6 9

Source: Annual Reports of Weyerhaeuser.

The main difference in the case companies’ strategies is that Weyerhaeuser and Georgia-Pacific were originally building products-oriented, whereas Mead was a paper producer. This is visible in Tables 4.7, 4.8 and 4.9, as Weyerhaeuser and Georgia-Pacific have made more moves in sawmills (2) and panels (6). They have also owned more land (1) and had more pulp assets (3) than Mead, even though in the Tables Mead seems to have made almost as many pulp and timberland actions. In fact, the companies have developed pulp production for opposite reasons – Mead in order to be more self-sufficient, and the other two to utilize sawmill leftovers and low value timberland assets. Mead also made many joint ventures in pulp, while the others more often kept full ownership, especially in their American pulp mills. Compared to Weyerhaeuser, Georgia-Pacific entered pulp production fairly late, in 1958, and announced less pure pulp actions, which explains its low (3) number. Tables 4.7, 4.8 and 4.9 show that the paper (4) and paperboard (5) sector was Mead’s area of focus. The others moved there later, mainly to gain more value from their pulp production. This is also reflected in paper and paperboard converting (7), which has been relatively more important to Mead than to the others. Most converting actions concern packaging activities, but Mead’s numbers also include many actions in stationery, school products and diaries. Tables 4.7, 4.8 and 4.9 show that all of the companies have been involved in marketing and distribution (8), but in varying degrees. Georgia-Pacific and Weyerhaeuser were mostly involved in building products distribution, while Mead has mostly been acquiring paper merchants. The decrease in Georgia-Pacific’s and Weyerhaeuser’s marketing activity is much due to an increase in activity in its other sectors. In the fourth period, Georgia-Pacific additionally restructured its existing building products distribution centers and expanded to paper distribution. Moves in other related businesses (9) have been less important, except for Weyerhaeuser in the early years as it tried to innovate new ways to use sawmill leftovers. Multiple actions (10) include actions that have contained assets from multiple categories, like timberland and sawmills, or pulp and paper. Activity in category (10) indicates the

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timing of the relatively big actions, although it does not tell their size. Weyerhaeuser has had fewer big actions than the others. Tables 4.7, 4.8 and 4.9 also indicate that Weyerhaeuser has had less unrelated diversifications (11) than the other two. But the numbers are not the entire story. Georgia-Pacific expanded to the production of various chemicals, gypsum, and furniture. Some of its chemicals were used in its plywood, panel, pulp, and paper businesses, and the gypsum production expanded Georgia-Pacific’s building products assortment. Weyerhaeuser expanded to land development and residential building, banking and mortgage operations, ornamental plant nurseries and salmon and hydroponic foods. Construction uses land and building products, and Weyerhaeuser possessed plenty of knowledge in seed orchards and water ecosystems. Mead expanded to furniture, metal castings, rubber, data services and color printers. All of these moves were completely unrelated to its paper business. Many of the case companies’ expansions were later divested, but Georgia-Pacific still is big in forest industry chemicals and Weyerhaeuser still has its land development business. Mead gained little from its unrelated diversifications. Completely unrelated diversification does not seem to pay in the forest industry. Additionally, the furniture business seems to be too far removed from the big companies’ resource base to be interesting. Table 4.10. Acquire, build, sell and closure actions of Georgia-Pacific, percentage.

Period 1 Period 2 Period 3 Period 4 Average

Acquire 60 53 42 28 46

Build d Togetherr 40 100 43 96 57 99 24 52 41 87

Selll 0 4 0 29 8

Close Togetherr 0 0 0 4 0 1 19 49 5 13

Total 100 100 100 100 100

Source: Action data collected from Annual Reports of Georgia-Pacific. Numbers truncated

Table 4.11. Acquire, build, sell and closure actions of Mead, percentage.

Period 1 Period 2 Period 3 Period 4 Average

Acquire 45 46 42 21 39

Build d Togetherr 36 81 42 88 35 78 28 49 35 74

Selll 10 8 15 29 15

Close Togetherr 10 19 4 13 7 22 22 51 11 26

Sum 100 100 100 100 100

Source: Action data collected from Annual Reports of Mead.

Table 4.12. Acquire, build, sell and closure actions of Weyerhaeuser, percentage.

Period 1 Period 2 Period 3 Period 4 Average

Acquire 34 28 31 24 29

Build d Togetherr 63 96 64 92 60 91 29 53 54 83

Selll 0 8 6 19 8

Close Togetherr 4 4 0 8 3 9 28 47 9 17

Source: Action data collected from m Annual Reports of Weyerhaeuser.

Sum 100 100 100 100 100

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Tables 4.10, 4.11 and 4.12 tell us what proportion of all strategic actions of the case companies have been acquisitions, organic development, divestments or closures. In short it shows how the case companies have managed their assets and how they have evolved. Georgia-Pacific and Mead have been keener in using acquisitions than Weyerhaeuser. Georgia-Pacific has made fewer decreasing moves than the others. Mead, on the other hand, has made more decreasing actions than the others, which indicates it has operated in a more mature business already at the beginning. Mead has also made some bad investment decisions, e.g. in the early years it acquired many small paper and board mills that soon were noticed to be unprofitable and were sold or closed. Mead has also tended to dispose of uninteresting assets one plant at a time, rather than by big divestments. Weyerhaeuser and Georgia-Pacific built many plants in the building products and plywood business during its growth spurt of the 1960s-1970s, which increased the proportion of their investments. In Tables 4.10, 4.11 and 4.12, the companies’ action profiles have become more similar on the fourth period. The cyclicality business and the more demanding business environment also increased the proportion of decreasing actions to around 50% of activity. The decreasing actions were not focused on single action types of Tables 4.7-4.9 in each company, but affected all of them rather uniformly. Above 50% decreases were witnessed in Georgia-Pacific’s timberland assets, in Mead’s paper production, and in Weyerhaeuser’s sawmill business. In the fourth period the companies preferred to close their old unprofitable mills, firstly because they were difficult to sell and secondly because this decreased the industry overcapacity, thus increasing the profit potential of their other mills. It must be noted that Tables 4.10-4.12 only tell about action activity. The number of actions does not correlate with the capacity of actions. E.g. while Georgia-Pacific and Weyerhaeuser seem to have made as many acquisitions as Mead in the fourth period, their acquisitions were huge, unlike Mead’s, as the historical narratives revealed. 4 REFLECTIONS ON THE CASES Unlike in the airline industry, the forest industry companies were found to rarely make public announcements “responding to” a competitor action. One reason for this could be that action irreversibility decreases response likelihood (Chen & MacMillan, 1992). Since the observed actions in the forest industry are irreversible big investments, the companies’ ability to match the action may be limited due to the lack of construction sites or acquisition candidates. Nevertheless, since actionresponse pairs were not recognized, this research could not analyze the action-andreaction characteristics found in previous studies (see Table 4.1). Additionally, since all the case companies in this research are big, old and in the same mature industry, there are only a few general demographic comparison points between them. Many antecedents were recognized that guide and limit the competitive action within the forest industry. Like the action predictors of Table 4.1, they help to predict the likelihood of a certain kind of action. However, unlike the action predictors, the antecedents suggest that some actions are more likely than others due to subtle evolutionary background influences. The existence of these antecedents

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additionally implies that a longitudinal competitive dynamics study should account for major changes in antecedents, because they make action likelihoods and patterns less comparable over long time periods. 4.1 The environment-related action antecedents. There have been strong strategy trends in the industry when all companies have made similar actions, like moving to packaging around 1960, unrelated diversification in the 1970s, successive waves of core focusing in the 1980s and 1990s, starting new paper machines at the bottom of the 1981 and 1991 downcycles, and the huge acquisitions made around cyclical market peak times. Also the internationalization happened in groups. It started in the 1960s when the companies were all interested in Canadian pulp mills, then the building products producers Weyerhaeuser and Georgia-Pacific acquired tropical hardwood forests and Weyerhaeuser and Mead acquired interests in European packaging converters. In the 1970s and 1980s the companies were not interested in Europe, and withdrew from their tropical operations around 1980. The internationalization development of the 1990s has been more unpredictable as Weyerhaeuser invested in Chinese box plants and southern hemisphere timberland and Mead invested in European packaging plants, while Georgia-Pacific turned into a European tissue producer through the James River acquisition. The similarity of actions also shows up in the way the companies’ four historical periods coincide. The companies appear to have constantly increased integration and scale economies by adding pulp mills and growing the size of their operations. The histories show there has been movement from commodity products toward higher value-added products, like consumer packaging and tissue. However, all are still strongly involved with the production of semi-finished and unconverted products. This implies that the spread of their value-chain has changed rather than their position in it. In the 20th century the companies also avoided building big production facilities abroad. Unrelated moves seem to slow down company development. It could be that in a mature business it is important to move with the flow. The industry typically produces undifferentiated bulk products. All of these rules could be called as the industry operation logic. Economic development, consumption patterns and demographics affect through product demand the companies’ growth, move activity (Table 4.6), and financial development. To give precise examples, GDP started rising and business activity improving after WWII. This and the growth period of the 1960s and the cyclical bottoms in GDP 1980-2000 affected the case companies’ activity and financial development directly. Then, as GDP rises, people have more money to spend and consumption patterns change. The Annual Reports showed how the demand for fast food, frozen food, and goods that needed single or multilayered packaging started rising in the 1950s. We also know that the amount of print advertising and office paper usage has vastly grown since WWII. Another example is the baby boom generation born after WWII, which needed houses in the 1960s and 1970s, thus increasing lumber demand. The forest industry companies have catered to the emerging demand. However, while important, economic development does not

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overpower competitive strategy. Even in the midst of the Great Depression the case companies found business opportunities: Georgia-Pacific in lumber exports, Weyerhaeuser in value-added pulp and lumber, while Mead innovated in coated papers and moved to paperboard, the demand for which grew as converters developed new paperboard-based products for consumers (Heinrich, 2001). Innovation also helped other American forest industry companies through the Depression, like Kimberly-Clark, which survived the Depression mostly because of its newly-invented brand-named consumerr products, Kleenex facial tissues and Kotex feminine hygiene products (Heinrich & Batchelor, 2004, p. 2). Government restrictions limit the companies’ growth opportunities directly. To give some examples of government restrictions that were mentioned in the case companies’ Annual Reports: land taxation discouraged land ownership and the replanting of trees in the early 1900s, taxes and supply restrictions limited growth during WWII, overseas investments were restricted at the end of the 1960s due to currency strength problems, and tighterr environment laws redirected company investment capital into environmental projects in the 1970s and again in the early 1990s. However, these situations also generated temporary business for the case companies, e.g. in supplying army needs and advising others in environmental projects. 4.2 The company-related action antecedents. Companies’ strategic actions are path dependent (see the Introduction chapter of this book) and dependent on their resource base. For example, Mead started as a paper and paperboard producer. It operated in papers over 100 years, and it still operates in value-added packaging, diaries and stationery. Weyerhaeuser initially focused on raw materials and sawmills. From there it expanded to land development and building products, to chemical pulp, and then further into containerboard, paper, containers, boxes and cartons to add value to existing raw materials. Georgia-Pacific started as a building products merchant, expanded to sawmills, timberland and panels, and then, like Weyerhaeuser, to pulp, containerboard, paper, and packaging. On the other hand, path dependency also shows in the willingness to make certain actions. Weyerhaeuser seems to have strictly expanded within the limits of its existing raw materials and production, and has emphasized timber. Still in 19731979 Weyerhaeuser defined itself as “The tree growing company”; from 1998-2005 its slogan has been “The future is growing.” Timber is an upstream product in the value-chain. On the other hand, Georgia-Pacific expanded to more various paper grades and to more or less-related businesses like chemicals. Recently it has moved downstream, as it has divested its timberland and building products distribution assets and strengthened its consumer products. The difference may lie in the fact that because of its merchant history Georgia-Pacific has defined its market opportunities more broadly. To conclude, there seems to be a pattern in which the companies are integrating down the value chain relating to their specific businesses, but also depending on their self-image. CEO influence guides the companies’ competitive actions. Georgia-Pacific, who had only 5 CEOs, grew the most, and was run by the old-guard managers until 1982.

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Mead had 12 CEOs and grew the least. Weyerhaeuser was led by the family until the late 1990s. This would imply that strong t CEOs can increase the company’s competitive aggressiveness and thus growth. To give concrete examples, George H. Weyerhaeuser changed Weyerhaeuser’s growth policy by deciding to use debt financing and increasing the number of acquisitions. He also changed the company strategy greatly, e.g. by diversifying into many new businesses, like residential development, and expanding the company into new geographic regions, like into sawmills in the Southern U.S. and tropical forests. His CEO period lasted for 26 years. After this he served an additional seven years as the chairman of the board. In Mead, J.W. McSwiney, who diversified the company into metal, rubber and data service industries, served 13 years as the CEO. In Georgia-Pacific, Robert B. Pamplin ran the company from 1960-1975, first as the president and later as the CEO. During these 16 years the company diversified greatly and grew through many acquisitions. On the other hand, the strategy influence of a CEO has been partly limited, as the companies often made similar moves within the industry. For example, all the companies chose to diversify into packaging conversion during the latter half of the 1950s. 5 CONCLUSIONS This study observed competitive dynamics and strategic evolution in the American forest industry through three longitudinal case studies. It was recognized that the three case companies did not represent the entire industry, but they nevertheless provided insights into the industry dynamics. This study was new in several ways: the competitive dynamics of the forest industry have not been previously studied, and the longitudinal case study approach was a novelty. Because of the case study approach the intention was to look beyond the previously-studied interplay of competitive actions and reactions, and instead to explore the antecedents of competitive action. The study was explorative, as it was uncertain what we could see by using this new research approach. The first conclusion of this explorative study is that the forest industry does provide interesting avenues for competitive dynamics research. The industry is very different from the previously-used samples, and while we seem not to be able to observe particular action-response dyads, the strong tendency towards similar actions implies an industry-wide competitive dynamic. A larger, possibly statistical sample might create interesting results. The second conclusion of this study is that longitudinal research on companies’ competitive actions reveals interesting insights into their evolution. However, as the case companies followed generally similar periodical development patterns, grew with same methods – although with a slightly different strategic focus had similar financial development, and did not openly compete with one another, it is difficult to make nonstatistical cross comparisons of their competitive dynamics evolution. Following the development of clear leader-challenger pairs would allow for more specific analysis. The third conclusion is that several kinds of economy and company antecedents were found to guide the competitive actions. At the economy level the companies’

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competitive choice was found to be limited by similar strategy trends, industry operation logic, economic development, consumption patterns, demographics, and government restrictions. On the company level, at least path dependency, self-image and CEO influence had an effect. Major changes in such antecedents should be accounted for in a longitudinal statistical study, e.g. by dividing the data into smaller independent periods. In the future, it would be useful to make a statistical longitudinal competitive dynamics case study in the forest industry by using a larger sample. Combining the case study and statistical research approaches would additionally create a more complete picture of the competitive dynamics within the industry. Alternatively, it might be useful to observe the longitudinal development of leader-challenger pairs generally, or in specific product grades.

CHAPTER 5

THE CHALLENGERS: KYMMENE, UNITED PAPER MILLS, AND METSÄLIITTO JARI OJALA University of Jyväskylä e-mail: [email protected]

JUHA-ANTTI LAMBERG Helsinki University of Technology e-mail: [email protected]

1 BUSINESS AND PRODUCTION 1.1 Markets, institutions and strategy choices Firms attempt to adapt themselves through their business strategies to the present and forthcoming (institutional and technical) environments. Whether these strategy choices are planned or implemented is the classic question in business history and strategic management. It is generally agreed that the basic aims of a firm is to be profitable (at least over the long term) and to survive. These basic assumptions seems to fit most of the current, publicly owned companies, but when we are dealing with e.g. governmental owned or cooperatives, this seemingly clear picture becomes fuzzy. This article aims to analyse three major Finnish forestry industry companies, namely Kymmene, United Paper Mills, and Metsäliitto (M-Real). The focus is on the strategies they adapted during the 20th century and the performance they produced. We argue that though the companies were seemingly different (e.g. due to different kinds of ownership structures), neither the strategies nor the performance differed significantly. This, we propose, can be explained by the similar kind of competitive and institutional environment the companies were engaged in. Our aim is besides to give a general overview of the “paths” of these companies, also to analyse specific strategy processes to understand the antecedents of strategic decisions.

107 Juha-Antti Lamberg, Juha Näsi, Jari Ojala, and Pasi Sajasalo (eds.), The Evolution of Competitive Strategies in Global Forestry t Industries: Comparative Perspectives, 107–139. © 2006 Springer. Printed in the Netherlands.

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The market fluctuations, global competition and the growth of the Finnish economy constrained the possibilities for the Finnish companies within their performance. Furthermore, the 20th century can be characterised not only as a time of progress but also as a period of turbulence in international political and socioeconomical settings. This turbulence caused time and again exogenous shocks to which Finnish forest industry companies had to adjust themselves. The most obvious changes in operational environment were due to the Russian revolution and Finnish independence, which totally changed the markets for the paper product firms; the Second World War had similar outcomes; and the European integration process from the 1950s on again changed the market structures (Ahvenainen, 1992b; Halme, 1955; Hjerppe, 1979, 1988; Hjerppe & Lamberg, 2000; Kuisma, 1993b; Pekkarinen & Vartiainen, 1993). The most essential strategy choices within the Finnish forest industries during the 20th century have been the elevation of the degree of processing, creation and abolition of related and unrelated diversification, vertical and horizontal integration, and finally concentration on the “core competencies” since the 1980s. During the last century the centre of gravity of the production of the Finnish major forest industry production moved upwards in the production chain, namely, from saw mills and pulp production to high grade paper industry products (Artto, 1995a&b; Huolman, 1992; Tainio, Räsänen, & Santalainen, 1985). The number of Finnish forest industry companies diminished due to the mergers with and acquisitions from the 1980s onwards. The most obvious reason for this accelerating concentration during the 1980s and 1990s was the insignificant concentration in the previous period. However, also other reasons can be traced. First, by the mid-1980s investments in new production facilities grew enormously due to the more advanced and expensive machinery. Thus, it was not possible for the small or medium-sized firms to make these kinds of investments. Second, investments and organic growth was not enough to enlarge the companies in relation to their competitors. Thus, mergers and acquisitions were in practice the only choices to attain growth and market share. The third reason for the seemingly slow concentration in Finnish forest industries has been the wide cooperation between the companies. Informal (and also formal) co-operation between the companies on certain levels of the supply chain is typical of the Finnish forest industry. The co-operation has been especially important at both ends of the production chain: in acquisition of the raw materials and semifinished products, and in marketing the products – according to porterian terms this can be characterised as quasi-integrated production (Porter, 1980, p. 14). Lumber purchasing companies were typical of utilising co-operation within the Finnish forest industry as were companies involved in the building of hydroelectric and nuclear power plants (Heikkinen, 2000; Ruostetsaari, 1989). Especially important was the co-operation within the sales associations: the marketing of Finnish products on the international markets was handled within these cartels up to the 1990s. Producers with different products had their own sales associations, such as Finnboard (for board), Finncell (pulp manufacturers), Finnpap (paper producers), and Converta (for Converted products) (Eloranta & Ojala, 2005; Heikkinen, 2000; Laiho, 1998). Cartels remained active up to the turn of the 1980s

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and 1990s, when they became obsolete due to the consolidation process – larger units and production enabled companies to handle the marketing by themselves far more efficiently than through the associations. Furthermore, the anti-cartel legislation of European Union made their existence illegal. In fact, due to the sales associations Finnish companies were understood as one actor in international markets. Sales associations such as Finncell, Finnboard, Finnpap, and Converta enabled also small companies to engage in the export trades, and thus, were the backbone for domestic investments. One of the most prominent figures in Finnish forest industries throughout the 1970s to end of the 1990s, CEO of Kaukas Corporation and later on CEO of Kymmene, Casimir Ehrnrooth once stated that e.g. Kaukas, a small family owned pulp producing company, would never have started to produce paper in the 1970s without the paper sales association Finnpap that secured markets for its products (Heikkinen, 2000; Huolman, 1992; Nevalainen, 1986). Partly due to the sustainable marketing channel Finnish paper and pulp industry companies invested extensively in production machinery, which in turn lead to a rather paradoxical situation by the beginning of the 1980s: in international terms companies were rather small, but still the production machinery was modern as were the products. When the concentration through mergers and acquisitions – as well as the true internationalisation of production – began in the mid-1980s this feature was the major competitive advantage for the Finnish forest industry firms within the international markets (Eloranta & Ojala, 2005; Skippari, Ojala, & Lamberg, 2005). 3500 3000 2500 2000 1500 1000 500

Sawn timber

95

90

19

85

19

80

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75

19

70

Pulp

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60

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55

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50

45

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40

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35

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30

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25

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0

Paper

Sources: (Oksanen & Pihkala, 1975); Finnish Official Statistics, Foreign Trade I A:2 1950–1997.

Figure 5.1. The value of Finnish exports: sawn timber, pulp, and paper 1920 11997(1920 = 100).

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Finnish forest industries can be easily understood deterministically from today’s point of view, when paper production is easily taken as the starting point also within the long term analyses. However, paper production emerged as the central line of business in Finnish forest industries rather late, only from the turn of the 1960s and 1970s onwards. Sawn timber and pulp dominated the exports for a long time, sawn timber at least from the 1830s up to the 1950s, then pulp for a couple of decades after this (Diesen, 1998; Huolman, 1992; Oksanen & Pihkala, 1975; Åström, 1988) (Figure 5.1). The centre of gravity changed during the turn of the 1960s and 1970s also due to the investment restriction agreements, in which the companies together with their interest group (Federation of Finnish Forest Industries) and government (Finnish Bank) made decisions on further investments. All larger investments were formally negotiated together with the Bank, Finnish Forest Industries Federation, and companies. The first investment restriction agreement came into force on December 18, 19701 (Kuusela, 1999). The aim of the agreements was on the one hand to reduce the exploitation of raw materials. Thus, the permission to built new production facilities e.g. for pulp and saw mills were hard to attain. However, the investments that would elevate the degree of domestic processing were allowed. Thus, exports of semi-finished goods (timber and pulp) declined due to the fact that especially pulp was now more and more refined to paper in domestic production plants. In fact, the 1970s and 1980s was the era of massive investments in the Finnish wood processing industry. For example, 28 new paper machines were built (Diesen, 1998; Lund, 1999; Nenonen, 1977). Between 1980 to 1983 altogether six new paper machines were built. All machines were large and modern constructions. Again, due to the investment restriction agreement, most of the machines were built to produce paper grades with a high degree of processing, like coated and fine papers (Kuusela, 1999; Maaseudun Tulevaisuus, 1981; Nenonen, 1977; Schybergson, 1983a). From the case companies in this study, Kymmene and United Paper Mills (UPM) have mainly operated in paper production – though both diversified to other branches as well during the post war period. Meanwhile, Metsäliitto re-oriented itself as a paper producer only during the 1970s and 1980s. E.g. still in 1985 familyowned Myllykoski produced more paper than Metsäliitto or Enso (e.g. Annual Report of Finnpap 1985). The Finnish forest industry is export-oriented. The main markets throughout the 20thh century have been in United Kingdom, Germany, France, United States, and Russia (Soviet Union). Dependence on a few, central market areas have increased not only market but also political volatility. Namely, e.g. the First and Second World War had a deep impact on the Finnish Forest Industries – the first one somewhat closed down the important paper and pulp exports to Russia, whilst after the Second one Finnish forest industries found new markets in the east, and even more importantly, increased imports of Russian round wood to the Finnish production plants. During the inter-war period e.g. France, Italy, Spain, and Germany aimed to 1

Archives of Finnish Forest Industries Federaration, Statements to investment restrictions, Memo May 22, 1969; Minutes of the working committee June 23, 1969.

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protect their own paper industries with protective tariffs and quotas. This somewhat diminished the possibilities for Finnish paper exports, but on the other hand there were still markets for chemical and mechanical pulp and sawn timber. Therefore, during the inter-war period the degree of processing within the Finnish forest industries as a whole became lower in comparison to the late 19th and early 20th century, when paper products were exported especially to the Russian markets. Also, right after the Second World War production strategy was re-directed e.g. to prefabricated houses that were exported to the Soviet Union as a part of war indemnities (e.g. Heikkinen, 2000; Lamberg & Ojala, 2001). After the Second World War, among the driving forces of production and marketing within the Finnish Forest industries have been liberalisation of international trade and the rise of the environmental movement. Finnish forest industry firms have basically favoured international free trade e.g. the European integration has partly enabled the investments in modern production technology, which in turn have had an impact to the higher degree of processing within the Finnish forest industries. Also, integration has enabled more investments abroad. The rise of the environmental movement has had perhaps more deep impact on the Finnish companies than is publicly admitted. Especially the use of recycled fibre grew enormously during the last decades of the 20th century, which had the impact of the re-location of production nearer to the raw materials, especially to Germany, France and United Kingdom (Heikkinen, 2000; Lamberg & Ojala, 2001). Thus, international institutional factors like the environmental movement have had an effect on the Finnish forest industries. But, also the domestic institutional setting and especially the changes of these constraints have both enabled and constrained the strategy choices of the individual companies. Foremost, the Finnish government has considered forest industries as the main industrial sector in the country – this, of course, is evident, given the fact that forest industry products have produced c. 50 to 70 per cent of exports. The share of the combined forest industry from the Finnish exports was in 1960 almost 70 per cent, while in 1999 the share was 30 per cent. At the same time, the share of the paper industry from Finnish exports has diminished from 42 to 24 per cent. The share of the whole forest cluster (including e.g. metal industries building machinery for the paper producers) is even higher. (Diesen, 1998; Hagström-Näsi, 1999; Hazley, 2000; Jääskeläinen, 2001) The needs of the important export sectorr and employer have been noticed in policy making. The governmental aid has been both direct and indirect, including forms like favourable tariff-policies and trade agreements in relation to exports, and moderate incomes policy and regional development grants in relation to the domestic production. Furthermore, the Finnish state had a positive attitude towards the sales associations. This, in fact, enabled these cartels to operate up to the turn of the 1980s and 1990s, though in many other European countries sales associations were dissolved during the post-war period. (Heikkinen, 2000) The sequential devaluations are usually addressed as the most important for of Governmental aid to forest industries – altogether 13 devaluations were made in 1949—1991 (Pekkarinen & Vartiainen, 1993; Skippari et al., 2005). The devaluations by no means increased the possibilities especially for the large companies, the inflation and rising labour costs cut the benefits usually in only a few

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years. Still, devaluations, relatively high inflation rates together with low interest rates before the 1990s had an important impact on the companies’ possibilities of acting on the international markets, but also on investment decisions. Furthermore, government has played an important role in raw material markets as well. Land acquisition acts in the early 20th century forbid the companies to acquire forest land, and forced them to buy most of the used materials from the markets. This, at least partly, made it also easy to establish and acquire production from abroad. The ownership structure of the Finnish Forest Industry firms can not be understood without taking into account the so called “sphere system”. A few financial spheres, the most important ones being the spheres around the two competing commercial banks, dominated the Finnish economy up to the turn of the 1980s and 1990s. Either through direct or complex ownership structures the spheres evidently dictated the decision making within the firms. The sphere system developed as a consequence of the growth of the financial institutions and at the same time due to the needs of the industrial enterprises to get financial backing. The forest industry companies played a central role within the industrial spheres, both in Finland and in Sweden, due to their national a importance (Kuisma, 2004; Moen & Lilja, 2001; Vihola, 2000). In Finland, the forest industry firms were usually the “flagship” companies of the spheres (Näsi, Lamberg, Ojala, & Sajasalo, 2001; Näsi and Sajasalo, in this volume). Kymmene was the flagship company of the Union Bank of Finland (SYP) for the whole of the 20th century, while United Paper Mills and Rauma-Repola were the flagships of National Bank of Finland (KOP). The merger between these two commercial banks in the mid-1990s as the Merita Bank (Today a part of the Nordea holding company) enabled also the merger between Kymmene and UPM (Kuisma, 2004; Moen & Lilja, 2001; Nordberg, 1998; Ojala and Lamberg, in this volume; Vihola, 2000). Spheres were institutional arrangements aiming to gain competitive advantages. At the same time, they shaped the behaviour and structure and formed the boundaries for corporations. Within their decision making the managers had to consider also the interests of the sphere, or “block specific interests”, as stated by Moen & Lilja. (2001, p. 108). In the next section we will analyse further t the strategy choices of three “key players” in the Finnish Forest industries, namely Kymmene, United Paper Mills, and Metsäliitto. First, a short narrative of the development paths of each company is given, following the comparative analysis using both financial and strategy action data. We aim to analyse the productivity and profitability of these case companies in relation to their strategy choices. In this way, we hope, we are able to analyse whether the choices made were dependent on the exogenous pressures, or were the companies and their spheres able to cope with the rapid structural t changes in the competitive and institutional environment. The important questions, therefore, are on the one hand, how successful the companies were in economic terms in relation to the strategy choices made, and on the other, what were the key determinants in the decision making? For the first question we try to find an answer by analysing the strategy actions made by the companies, and for the second one by giving a more detailed account on certain strategy choice decision processes.

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2 KYMMENE CORPORATION2 Kymmene Corporation was a path breaker in Finnish industrial history3. It remained one of the largest Finnish companies throughout the 20th century, though it lost its share to other forest industry companies during the latter part of the century. During the early part of the 20th century the share of the Kymmene Corporation of the Finnish total paper production was around one third, in 1946 it was only one fourth, and diminished to c. 15 per cent by 1970. Still, in 1990 the Kymmene Corporation was the largest producer e.g. of fine papers in the whole of Europe (Heikkinen, 2000; Huolman, 1992; Talouselämä, 1972). The strategy choices made by Kymmene in the past can not be understood without investigating the ownership structure of the firm. Though it was a limited liability company, the major role in decision making was undertaken by the bank sphere Union Bank of Finland (SYP) (Kuisma, 2000, 2004; Pipping, 1962; Vihola, 2000). The history of the Kymmene Corporation can be roughly divided into four eras. During the first era (1904 – 1944) the company was founded by merging three paper producing firms (Kuusankoski, Kymmene, and Voikkaa) (Talvi, 1979). The company had certain difficulties (Pajunen, 2004), but managed to grow during the last years of the Russian era by exporting paper products on a larger scale to Russia. After the First World War, Kymmene succeeded in finding new markets from the west, especially from Great Britain. During the interwar period Kymmene was one of the first Finnish corporations that also had production facilities abroad. (Ahvenainen, 1976) The historical strategy of the Kymmene Corporation was chosen when the company was founded: to produce paper as much and as efficiently as possible. The economies of scale was the key object of the founder of the merger and the first CEO of the company, Rudolf Elving (Karonen, 2004). The Kymmene Corporation was the largest paper producer in the Nordic countries in the early 20th century and the largest industrial enterprise in Finland. On the whole, the three paper factories within the company produced one third of the Finnish paper production. (Ahvenainen, 1972; Pipping, 1962; Talvi, 1972, 1979) Besides the economies of scale also vertical integration was a typical y feature for the Kymmene Corporation from the early 20th century up to the 1990s. Especially in the early parts of the century the company acquired large forest areas in order to save the raw material supplies. Even the unrelated diversification of the company first started due to the vertical integration: the company acquired a metal industry company in the 1930s due to its large forest ownership. Justt before the Second World War the company 2

3

In the text the name Kymmene (Corporation) is used. The official name of the company has changed several times e.g. due to the mergers. The official names have been: Kymmene Aktiebolag (1904— 1931); Kymin osakeyhtiö — Kymmene aktiebolag (1931—1977); KymiKymmene (1977—1983); Kymi-Strömberg (1983—1987); Kymmene Oy (1987—1995); UPM-Kymmene (1996—) There are a number of studies written about the Kymmene Corporation. The most notable ones, however, deal basically with the pre Second World War -period. Therefore, in this article, for the Post War period also archival records of Kymmene are used, as well as certain magazines (like Talouselämä), and Annual Reports and other published materials of the Company. Of the studies dealing with Kymmene Corporation see especially: Ahvenainen, 1972; Hoving, 1947; Hoving, 1949; Linderborg, 1997; Talvi, 1972, 1979. This studyy is partly based also on Ojala, 2001b.

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owned almost 400 000 hectares of forest. (Ahvenainen, 1972; Hjerppe, 1979; Hoving, 1947; Talvi, 1972, 1979) The period after the Second World War (1945 – 1965) was again a time of readjustment after severe exogenous shock. The company lost due to the war production facilities (including two factories), one third of its landed property, and it was unable to carry out investments even during the 1950s. It was only in 1955 when the company succeeded in reaching the production that it had enjoyed before the Second World War. (Heikkinen, 2000; Huolman, 1992; Talouselämä, 1955, 1958; Annual Report of Kymmene 1971) Even by the turn of the 1950s and 1960s the company had certain financial difficulties and was not able to carry out investment projects as planned4. The following period (1965 – 1985) was the time of huge investments, internationalisation, and diversification. New production facilities and machinery were built (Alajoutsijärvi, 1996; Linderborg, r 1997). Furthermore, the company bought and built facilities also in West-Germany, France, and North America. Not all these international investments were, however, successful. Especially the industrial combine built in Canada (Eurocan) proved to be disastrous (Ahvenainen, 1992b)5. Diversification culminated in a merger with the metal industry conglomerate Strömberg. This merger was a part of the bank sphere decisions at the time: it was carefully planned with the bank sphere SYP, and was even emphasised due to the fact that the CEO of Kymmene at the time (Fredrik Castrén) was the former CEO of the Strömberg Corporation (Luotonen, 1985; Nevalainen, 1982, 1983; Rantanen, 1978; Rinne, 1982; Annual Reports of Kymmene Corporation 1983 and 1984). The archives of the Kymmene Corporation and its strategy committee at the time reveals a detailed account of the merger process. The process of merging Strömberg with the Kymmene Corporation was in fact, a long one. Already in the 1950s and 1960s some shares from Strömberg were bought (mainly due to the sphere related reasons), and the stake in the company grew during the 1970s6. The merger was not as successful as it was planned to be, and the “ideal” marriage between metal and forest industries was dismantled after only two years. 7 The merger was also widely debated in public discussion at the time (Luotonen, 1986; Nevalainen, 1985).

4 5

6 7

Archives of Kymmene Corporation, Minutes off Board Meetings February 14, 1961; March 16, 1961. Due to the fact that a number of Finnish Companies jointly established the Eurocan project, this internationalisation process can be detected from m various archives, from which the archives of Kymmene, Enso(-Gutzeit), and Tampella are available for the researchers. The main archives of Eurocan are situated in the Enso archives. See especially: Archives of Kymmene Corporation (Kuusankoski), Documents of (CEO) Kurt Swanljung, Eurocan affairs (numbers 2 and 3); Central Business Archives of Finland (ELKA, Mikkeli), Archives of Enso Corporation, Eurocan archives 1967—1979; Archives of Tampella Corporation, Minutes of Board meetings 4 — 5/1976. Archives of Kymmene Corporation, Minutes of Board Meeting November 22, 1961. Already by the beginning of 1986 a number of companies were interested in buying Strömberg out from Kymmene due to the growing rumours of Kymmene’s willing to sell. By the summer of the same year, the strategy committee of Kymmene had already planned actively to sell Strömberg as soon as possible. Archives of Kymmene Corporation, Kuusankoski, Strategic Planning Committee of the Kymmene-Strömberg January 27, 1986; June 16, 1986.

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The fourth period (1985 – 1996) was an era of concentration, mergers, and investments. Within only a few years Kymmene sold out the diversified parts and concentrated on paper production. The company invested more than ever during its history. In 1986 the company had altogether 19 paper machines, but in 1992 it already had 24 machines. (Alajoutsijärvi, 1996; Huolman, 1992; Lilius, 1992; Mikkonen, 1992; Nevalainen, 1986; Annual Report of Kymmene Corporation 1987) When the depression in the early 1990s hit the forest industries, Kymmene Corporation was modern but excessively indebted. In 1996 Kymmene was merged with Repola (United Paper Mills) as UPM-Kymmene. This merger was in many aspects one of the most important ones in Finnish economic history. First, it created an international forest industry giant. Secondly, it reformulated also other companies and industrial sectors (e.g. metal industries) in Finland. Thirdly, it was only possible due to the previous merger of the competing commercial banks, SYP and KOP, which put an end to the old sphere system in Finland (Kuisma, 2004; Vihola, 2000, p. 322–335). Though the strategies adapted by the Kymmene Corporation were by and large similar as in the other Finnish forest industry companies, certain emphasis can be found. Firstly, as compared e.g. to United Paper Mills, Kymmene certainly stressed more the importance of having its own raw material base. Secondly, in marketing Kymmene was not as enthusiastic with the sales association as the other Finnish companies were. Though Kymmene was among the founding members with Finnpap in 1918, it resigned from the association already in 1921 and created its own sales network with Western Europe (Heikkinen, 2000; Hoving, 1947; Nordberg, 1980). A similar pattern occurred also after the Second World War: Kymmene first joined the association, but resigned from it in the mid-1970s8 (Heikkinen, 2000; Monto, 1976; Nevalainen, 1982; Talouselämä, 1975). Thirdly, Kymmene Corporation was the first Finnish forestry industry company that established production facilities abroad, and was among the leading figures in the internationalisation process in the 1960s and 1970s. Besides Nordland Papier in West-Germany (founded in 1966) and Caledonian Paper in Scotland (founded in 1986), however, internationalisation proved to be unsuccessful: all the other important facilities were either totally or att least partly closed or sold by the 1990s (Ojala, 2001b). Even the selling of the share in Nordland Papier was under discussion in the mid-1980s.9 What were the driving forces within the most important strategy decisions? Some information can be found from the archives of the Kymmene Corporation’s strategy committee meetings, especially from the early 1980s, when the past decisions were widely discussed and analysed. For example, the internationalisation in the 1930s by buying production facilities from Great Britain was related to the fear of the paper import restrictions in Britain. Thus, the internationalisation started as an action towards the possible restriction in order to get own production to the 8

9

Kymmene rejoined again both Finnpap and Finncell due to the fact that its own sales organisation was not ready. Only in the late 1980s did it resign from Finnpap for good. Archives of Kymmene Corporation (Kuusankoski), Documents of (CEO) Kurt Swanljung, Finnpap 1975 (number 5). Archives of Kymmene Corporation, Kuusankoski, Strategic Planning Committee of the Kymmene Group February 15, 1985.

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country. (Ahvenainen, 1972, 1976) Also the internationalisation to West Germany was related to marketing: the company wanted to have a stronger hold on the fine paper markets within the country.10 As regards to the diversification and the major merger with Strömberg, again, one can find an implemented rather than planned strategy. Though the situation regarding the shares of Strömberg owned by Kymmene was repeatedly discussed especially in the meetings of the strategy committee at the turn of the 1970s and 1980s, the key question was how to sell these shares rather than merge the company with Kymmene. Especially, in this merger the role played by the Union Bank of Finland was profound: the CEO of the bank, Mika Tiivola, who was also the member of the strategy committee, strongly spoke up for the merger.11 On the whole, the role played by the bank sphere can be easily detected from the board meetings: the CEO of the bank was a member of the board, and actively participated in the decision making process. In fact, the long term CEO of the SYP, Mika Tiivola, stated after his retirement, that Kymmene was always the “number one” besides his career as banker (Malin, 1986; Mikkonen, 1992; Näsi, Ranta, & Sajasalo, 1998). Though the ownership of the banks by the companies were restricted by law, the real influence was much larger than the direct ownership due to the ownership through other companies. Furthermore, the Kymmene Corporation also owned a reasonable share of the bank and, thus, also participated in the bank’s decision making.12 3 UNITED PAPER MILLS If Kymmene can be regarded as the leader in the early 20th century Finnish forest industries, then United Paper Mills (UPM, Yhtyneet Paperitehtaat in Finnish) was surely its successor that bypassed Kymmene as the largest paper producer in the country, and merged with Kymmene in 1996. Still, already in the early 1920s, when United Paper Mills was created, it was the second largest paper producer in the country. However, during that time the major forest industry companies (such as Enso and Ahlström) were still engaged mostly in sawmill industries, and paper producers had just experienced a drawback due to the closing down of the Russian markets after the revolution. United Paper Mills was the winner of the century long competition between the Finnish forest industry companies: today UPM-Kymmene is more related to the old United Paper Mills than to the other companies that merged with the company during the last two decades. (Näsi et al., 1998; Ojala, 2001a; Vesikansa, 1999) It was not until the first years of the new millennium that

10

11

12

Archives of Kymmene Corporation, Kuusankoski, Strategic Planning Committee of the Kymmene Group November 5, 1982. Archives of Kymmene Corporation, Strategic Planning Committee of the Kymmene Group, Minutes October 10, 1979; December 12, 1979; June 19, 1980; June 24, 1981; August 20, 1981; November 2 1981; December 12, 1983. For example, in the early 1960s it was carefully planned at the Board meetings that the share of Kymmene’s ownership in the Bank would also remain at the previous level. Archives of Kymmene Corporation (Kuusankoski), Minutes of Board Meeting April 14, 1961.

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black clouds occurred on the horizon. Why did United Paper Mills succeed in the competition? United Paper Mills was created in 1920 after the merge of three paper producing firms (Simpele, Myllykoski and Jämsänkoski). The creator of the company, Rudolf Walden was a major figure not only in Finnish industrial history, but also in the political arena. (Juva, 1957; Nordberg, 1980) Walden had bought the major stake from Simpele in 1916, and after the Finnish civil war (1918) he bought one third from Myllykoski. Due to the lack of pulp production Simpele and Myllykoski bought thereafter pulp producer Jämsänkoski. Now these three units formed a “personal union”, lead by Walden. Thus, the merger was only a question of time.13 (Nordberg, 1980) Later in the 1930s a large Walkiakoski paper company was merged to UPM – again as a part of Walden’s personal commitment (Pajunen 2004; Annual Report of United Paper Mills 1971). United Paper Mills was Walden’s company, though he was not the only owner. Besides Walden and his family, a major role was played by the Björnberg-family. During the Second World War Rudolf Walden was again recruited by the army – to be a general, and the minister of defence. In fact, he is mostly known in Finnish history for his role as one of the major players in the war. Due to Rudolf Walden’s new role, his son, Juuso Walden was nominated as the CEO of the company in 1940. Right from the beginning Juuso Walden had a number of disagreements with C. G. Björnberg, the leader of the other owner group. By 1951 this disagreement, mostly based on a personal level, led to an odd and unique solution in Finnish business history. Namely, the firm was divided between the two families (Nordberg, 1980; Talouselämä, 1952). CEO of the Union Bank of Finland Göran Ehrnrooth, acted as the middleman. The company was dissolved in a “salomonian way” so that Björnberg obtained first the permission to divide the company into two parts, and then Walden was given the right to choose first. Björnberg was mainly interested only on the old family company, Myllykoski and, thus, left everything else, a much larger portion to Walden. Walden took the bite as expected. Besides the production units in Simpele, Valkeakoski (Tervasaari) and Jämsänkoski, Walden got in the deal also an important number of shares in river power stations in Northern Finland and around 99 per cent of the landed property. Furthermore, Walden got the paper converting unit (Paperituote), engine shop (Jylhävaara) and the chemical unit (Valke). (Nordberg, 1980, 1998) Today Myllykoski is an independent, middle sized paper producer which is important especially in the European markets, but also in the United States. Juuso Walden started a period of strong growth with UPM after he gained power. Whereas most of the Finnish forest industry companies were rather cautious about investments in the early 1950s, United Paper Mills carried out the largest investments in Finnish forest industries so far – namely, the building of Kaipola paper mill in Jämsä. Internationalisation started at the turn of the 1950s and 1960s, and also further investments in Finland were made. But then, everything crashed. By the mid-1960s it had become evident that UPM had over invested, its profitability was 13

Also fourth minor unit, Kangaskoski belonged also to the original UPM – this unit was bought by Simpele just before the merger. Kangaskoski was, however, closed already in 1925.

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weak, and the company was about to go bankrupt. Since the division of the company, UPM had been funded by the other major commercial bank in Finland, KOP. In fact, the company was the “flag ship” in the KOP-sphere that dominated circa half of the Finnish industries. The bank became worried in the mid-1960s and used its power and forced Juuso Walden to retire. (Annual Report of UPM 1969) A new CEO was nominated, Niilo Hakkarainen, who had gained experience as the CEO of a major Finnish Forest Industry Company Kemi. (Hakkarainen, 1993; Nordberg, 1998) The United Paper Mills today is the creation of not only two Walden’s, but also of Niilo Hakkarainen. Unlike his two predecessors Hakkarainen was not a widely known popular figure in Finland. But he knew paper industries perhaps better than no-other industry leader in Finland during the 1970s and 1980s. His period as CEO was the time of technocratic growth. He downsized the unrelated businesses, invested in new and at the time unknown technology (especially thermo mechanical pulp, TMP), and made even organisational reforms. (Hakkarainen, 1993; Annual Report of UPM 1971) By the turn of the 1980s and 1990s Hakkarainen was forced to resign by the bank sphere KOP. The reason was that Hakkarainen was not willing to participate in the merger plans of the bank – he claimed afterwards that the bank wanted to use the assets of the company in reorganising the sphere’s ownership in various companies (Hakkarainen, 1993; Vesikansa, 1999). After the mid-1980s the merger wave occurred to the Finnish forest industries, and United Paper Mills also participated in this evolution. First, UPM and Kajaani Corporation were merged. Both companies belonged to KOP sphere. Thereafter, there was a plan to merge conglomerate Rauma-Repola with UPM, but this merger caused trouble since Metsä-Serla succeeded in acquiring a one fourth stake in the company in 1990. After a confusing period KOP sphere was able to acquire RaumaRepola and the merger was continued. The merged company became known as “Repola”, and the forest industry division got the name United Paper Mills (Hakkarainen, 1993; Pietilä, 1997; Annual Report of UPM 1989). The formation of Repola was the largest merger made up until then in Finnish economic history. Still, it was only a prelude to the future. Namely, after the two competing bank spheres, SYP and KOP were merged after the collapse of the Finnish financial markets, this also opened the way to the merger of the two dominant paper companies. Thus, in 1996 Repola and Kymmene were merged. This created UPM-Kymmene corporation. The metal industry and other branches of the conglomerate were soon separated into separate companies, and what remained, was one of the world largest paper and pulp producers. (Näsi et al., 1998; Ojala, 2001a; Pietilä, 1997) 3.1 Strategy of UPM United Paper Mills had certain historical strategies up to the merger with Kymmene in 1996 (Table 5.1). These strategies remained somewhat stable throughout the 20th century. These strategies include avoidance of vertical integration and diversification (the company had e.g. insignificant forest property and was not integrated to a large scale in pulp production), energy intensive production that was underpinned with shares in power companies, marketing through sales associations,

No

No /at the end of the period yes

Yes

1940-1969 No

1969-1990 No /at the end of period yes

1990-1998 Yes

Source: Ojala 2001b.

At the beginning of the period Yes

1920-1940 No

Sales associations within the marketing Yes Yes

Warm

No

No

Active

Active

Active

Insignificant Active

Functional

No (during the Warm war yes)

No

Concentration Diversification Relationship Public to paper to political image leaders production

Yes Yes Shares in power companies/ bought/ Yes Shares in Yes power companies/ bought/ Shares in Yes to 1995 Yes power companies/ bought/

Bought

Energy

Own forest property

Period

Pulp production important

t Paper Mills, 1920—1998. Historical strategies of Yhtyneet Paperitehtaat/United

Table 5.1.

KYMMENEE, UNITED PAPER MILLSS, AND METSÄLIITTO 119

concentration on paper production (especially newspaper production), close relationship between company’s top-management and political leaders in the country, and maintaining a positive public image. The image of the company was personalised through the leaders: Rudolf Walden was regarded almost as mythical hero-general during the Second World War and his son Juuso Walden was known as “the last patriarch” in Finnish business (Juva, 1957; Nordberg, 1980).

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These factors remained important in the activities of United Paper Mills up to the turn of the 1980s and 1990s. The strategies also caused path dependencies for the company. Indeed, the company’s success was related greatly to its history: to the former decisions, resources and know how. This can be detected on the one hand e.g. in the lack off the forest property14 and pulp production15 and on the other hand in the shares of power companies.16 (Ahvenainen, 1972; Hakkarainen, 1993; Jaakkola, 1986; Nordberg, 1980, 1998; Näsi et al., 1998; Ruostetsaari, 1989; Annual Report of UPM 1956, 1986; 1990; 1995) These factors were among the driving forces when the company sought new possibilities to produce paper in the 1970s. Namely, in-order to avoid the buying of market pulp, diminish the usage of raw timber, and to acquire the most advantage from the energy resources the company had it started to produce thermo mechanical pulp (TMP), which was one reason for the company’s success during the following decades. An important path dependence was relying on the sales associations. Already in the early 1920s United Paper Mills and especially the creator of the company, Rudolf Walden, was one of the founding fathers of the Finnish sales associations. In fact, before beginning his own paper production, Walden was a sales agent for the Finnish paper companies in St. Petersburg, Russia. Therefore, he had vast experience of organising sales jointly with other companies and was the key figure in organising sales associations after the Russian revolution and Finnish independence. Walden was active even in creating cooperation between international paper producers, especially in Nordic negotiations during the interwar period. (Heikkinen, 2000; Nordberg, 1980; Annual Report of UPM 1994) After the Second World War Juuso Walden, for his part, was the founder of Converta – the Finnish sales association for the converted paper products (Eloranta & Ojala, 2005; Nordberg, 1980, 1998). United Paper Mills relied on Finnpap and other sales associations up to the mid 1990s when sales associations were dismantled partly due to the pressure from the EU (associations were regarded as illegal cartels). As a curiosity of history Finnpap then became merged as a part of United Paper Mills, after the association was forced to close down. Thus, e.g. the archives of this major sales association are located as a part of United Paper Mills archives (Heikkinen, 2000; Annual Reportt of UPM 1995). Even Niilo Hakkarainen was an active supporter of sales associations throughout the 1970s and 1980s, 14

15

16

When UPM was first created in 1920 it had almost 17 000 hectares of wood land, whilst Kymmene owned around the same time almost 250 000 hectares and Enso almost 450 000 hectares. It was not until the mergers in the 1990s that UPM’s forest ownership grew; e.g. in the mid 1990s, just before the merger with Kymmene, the corporation had around 475 000 hectares of wood land. During the 1980s the company became more interested in pulp production and participated in three joint ventures that built new pulp capacity (Joutseno Pulp, Pohjan Sellu Oy, and Metsä-Botnia). Three fourths of their own power capacity was acquired during the 1940s. In the early 1950s the company acquired a share from the state lead energy corporation Kemijoki and negotiated long term energy supply contracts with Imatran Voima, the state owned energy company. Also during the following decades the ensuring of the energy supplies was among the key issues in the company’s strategy. Therefore, UPM was especially active in lobbying nuclear power to the country. The company e.g. was a shareowner in Teollisuuden Voima, the first private nuclear power company in the country. Through the active ownership in the energy companies, according to Ilkka Ruostetsaari (1989), United Paper Mills was able influence domestic energy policies.

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though at the time a number of major players in Finnish forest industries were ready to withdraw from the associations (most notably Kymmene and Enso). Niilo Hakkarainen stated that in “world markets UPM is a little boy, but Finnpap gives us strength” (Hakkarainen, 1993; Rantanen, 1987). The third path dependence in United Paper Mill’s history is the concentration on paper production. Unlike many other paper producers in Finland today, UPM was a paper producer right from the beginning: it never had as many related or unrelated businesses as many of its competitors had (Huolman, 1992; Lilja, Räsänen & Tainio, 1991b; Luotonen, 1980; Mikkonen, 1989). Newspaper production was the dominant line of business: e.g. in 1920 about 80 per cent of the production was created from newsprint and office papers. During the 1930s the concentration on newsprint production continued further, e.g. by establishing new production facilities in Myllykoski. (Nordberg, 1980) After the division of the company the modern production facilities of Myllykoski were lost. Mostly due to this, the investments in Kaipola were carried out: in just a couple of years in the 1950s Kaipola paper mill grew to becoming the largest producer of newsprint in Finland. It was not until the merger with Kymmene in the mid-1990s that the company became big in regards to the number of paper branches: in magazine papers it was now the world leader, and in news- and office papers among the largest in Europe (Annual Report of UPM 1998). United Paper Mills had only a limited amount of related forest industry businesses. It was not self-sufficient in pulp production, neither did it have sawmills (Nordberg, 1998). During the 1970s the company acquired a number of small saw mills. However, the aim was not to increase sawmilling capacity, but to acquire the raw material bases of these companies (Luotonen, 1975; Annual Reports of UPM 1973; 1974). As many other forest industry companies, United Paper Mills never diversified extensively to unrelated lines of business. During the Second World War a metal industry unit (Jylhävaara) was launched to produce cartridges for the armed forces. Lately, this unit was used as an engine shop to aid other branches of the company. Throughout the 1950s to 1970s it was an important producer of certain components and machinery used in paper machines. (Nordberg, 1980, 1998) Why did United Paper Mills succeed fairly well in the century long competition? At least five determinants can be found to explain the success. The first is related to the historical strategy adopted by the company, partly relating to the path dependencies described above. The strategy was, however, partly planned and partly implemented after the changes in the environment. The other, related explanation is the investment decisions carried out in the company. Throughout its history UPM has sought growth though investments that were even carried out e.g. at the beginning of the 1930s, 1950s, 1960s, and 1990s – thus, mostly during the times of depression. Though many of these investments were economically difficult for the company in the long term, most of them have proved to be successful only in the long term perspective – as it was the case with the Kaipola Mill built at the beginning of the 1950s. The third reason is again related to the first one; namely, due to its historical path UPM did not have until the 1990s as much real assets (such as forest land) as its domestic rivals. It had certain difficulties also in obtaining loans due to the lack of

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asset, and was, thus, forced to carry the costs of investments more than its rivals through cash flow financing. The fourth key element is the active owners, whether they were owner-managers (as Waldens were) or bank sphere KOP. The sphere system was at least in the case of UPM functional: the bank ownership was active, professional and results oriented. Fifthly, United Paper Mills was cooperative towards its domestic competitors. The company was the driving force in the major sales associations, and tried to avoid conflicts in inter- and intra-sphere relations. (Ojala, 2001a) 4 METSÄLIITTO Among the most fascinating success stories in the global forest industry are the cooperatives Finnish Metsäliitto and Norwegian Norske Skog that rose to be part of the group of large industry players during the 1980—1990s. In 1974, Metsäliitto was the 93rd largest paper producer but by 1999 had already risen to 13thh (Paper and Pulp International, 1975, 2000). The story is fascinating for various reasons. First, Metsäliitto was originally founded not as a for-profit organization but to support the forest-owners position vis-à-vis the policies of the forest companies. Through the 1900—1930s the rural peasants had opposed the forest companies attempts to acquire forest land. Forest companies and their strategies to secure their raw material supply were seen as an aggressive and balance-breaking economic-political block that threatened the traditional small peasantry (Zetterberg, 1983, p. 13—16). Also, the political circles behind the peasantry r accused the pricing of round wood to weakening the economic welfare of the small peasants. Consequently, when Metsäliitto was finally founded in 1934 its primary function was simply to support the landowners’ legal and economic rights and to act as a counterbalance to Kymi, UPM and other major wood processing companies (Metsäliitto Annual Report 1947). Second, and consequently, the strategic logic of Metsäliitto that has essentially driven all competitive actions has been to offer a channel for landowners to sell their round wood to a dedicated company outside the power blocks of the other forest industry companies. This has resulted in three specific principles that explains the majority of the strategy development of the co-operative (further discussion in Lamberg, 2001a): a) the offered price for round wood was traditionally in par or higher than the one of competitors; b) before the 1990s it was very difficult to consider international production requiring the acquisition of non-Finnish raw material and c) Metsäliitto must have produced all kinds of wood based products to be able to secure a market for all round wood that has been offered by the memberowners of the co-operative. Thus, the dual role of owners as raw material providers and shareholders has in essence been the ultimate driving force of all strategic development prior to the 1990s. After that the various parts of the co-operative have internationalized rapidly which has created opportunities for expansion but also created a certain mismatch between the original company mission and the demands of the globalizing competition.

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4.1 Early development: geographical expansion in Finland Metsäliitto was founded as a public company in 1934 and converted to a cooperative in 1947 (Zetterberg, 1983). Since the beginning, the decisive power was in the hands of the Central Association of the Agricultural Producers (CAAP) as the co-operative ownership structure has made the organizations shareholders a very fragmented group. The co-operative had obtained over 50 000 members already by the beginning of the 1950s and in 2000 over 100 000 (Metsäliitto Annual Reports 1952 and 2000). Especially at the beginning of the co-operative these small shareholders were a crucial resource as they not only sold round wood but also provided financial support for the company expansions. Through its first years of existence, Metsäliitto concentrated almost solely on exporting round wood as the incumbent forest industry firms refused to acquire raw material from the new – in many senses hostile – organizations. The export trade had to be expanded to its own production as the wide array of owners needed markets for their round wood. Metsäliitto started its own industrial production in the sawmill business in 1948—1949 and acquired several sawmill and wood processing companies in the following years (Zetterberg, 1983). The next, very obvious, development was the expansion to the pulp business. After collecting capital for several years, Metsäliitto acquired the Wärtsilä pulp mill in Äänekoski which still is one of the main production centres of the company. The mill produced not only pulp but also paper and paperboard. The deal also included large amounts of forest land (Kulha, 1981). The acquisition of Äänekoski was a huge stretch for the still relatively small organization. Its strategic importance was, nevertheless, paramount. First, it expanded the possibilities to acquire round wood. Second, own industrial production created an opportunity to obtain information from the market situation in the paper and pulp industry and also gradually opened access to the group of incumbent Finnish forest industry companies. Third, the Äänekoski operation created a model for future geographic expansion in terms of finances and company internal politics driving the expansion strategy (Lamberg, 2001a). The Äänekoski operation required organizational resources throughout the 1950s. However, for the following decades the strategy was to imitate that particular case by founding new production in all parts of Finland. By expanding inside the Finnish borders the CAAP elite wanted to create demand for round wood and thus to motivate new members to join the co-operative. This strategy was successfully implemented in the 1960—1970s. After the Äänekoski Mill, Metsäliitto founded the Metsä-Saimaa in south-eastern Finland and the Kirkniemi paper mill in southern Finland (Metsäliitto Annual Reports 1961 and 1966). Metsäliitto estimated that these locations were lacking competition and thus ideal for greenfield investments. Similarly, Metsäliitto acquired Savon Sellu to serve the landowners in eastern Finland at the end of the 1960s (further discussion in Lamberg, 2001a). The next major expansion was the founding of Metsä-Botnia. The idea was again to widen the geographical coverage of the company. The project started in 1970 when Metsäliitto acquired an ideal placement for a new mill from Kaskinen in the

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west-coast of Finland. However, the opposition of the Bank of Finland (and the other wood processing companies) slowed the process and forced Metsäliitto to reformulate its strategy. The solution was to create an alliance with Nokia and Serlachius. Via this joint-venture Metsäliitto was able to prevent the political resistance but it also created a model of expansion that was widely implemented throughout the 1980—1990s. Metsäliitto owned 51 per cent of Metsä-Botnia but was able to secure a powerful position in the local raw material market. The same strategy was followed in 1980 when Metsäliitto acquired 40 per cent of the Kemi company but was able to channel its raw material supply via its own organization (Metsäliitto Annual Report 1980). Metsäliitto’s domestic geographical expansion was completed finally in 1996 when it acquired the two mills in Joutseno and Simpele (Metsäliitto Annual Report 1996). The traditional expansion strategy and the logic underpinning it was vividly concluded by one of the powerful figures behind the company headquarters: “We do not know the return of investments (in the case of Simpele and Joutseno). However, for our members it was an important step. Now we have the same market share in the round wood market as in the other parts of Finland (Arimo Uusitalo; Helsingin Sanomat, 1999).

4.2 The next phase: internationalization, alliances and mergers The 1980—1990s was a period of rapid growth characterized by strategic actions that no longer deviated Metsäliitto from the other major wood processing firms. First, Metsäliitto started to internationalize in par with the other Finnish companies. Second, mergers and acquisitions received growing importance vis-à-vis the traditional green field investments. Finally, Metsäliitto continued to create alliances in magnitude that was not usual in other major companies. The changes in strategic behaviour were in line with the environmental changes in the competitive and institutional environment of the industry. t These pressures gradually forced Metsäliitto to ‘normalize’ and to adopt more mimetic actions than previously. Along this process, however, Metsäliitto continued to acquire a larger share in the domestic raw material market. In terms of economic and competitive importance this activity was marginal in comparison to the growth of scale that resulted from the major mergers and acquisitions that the company initiated in the 1980—1990s (Lamberg, 2001a). Metsäliitto, for example, continued to acquire small sawmills around the Finnish countryside but simultaneously aimed for a dominant international position in specific niche markets in paper and pulp trade. At the same time, Metsäliitto had to built its own marketing organization as the national sales associations gradually diminished in the 1980—1990s. In the domestic scene, the merger with Serlachius in 1986 finally raised Metsäliitto to the same scale as Enso, UPM and Kymi in terms of production and organizational structure (see Näsi, Sierilä and Sajasalo 1998). The ownership structure slowed Metsälliitto’s internationalization that had finally started partly by accident. The Savon Sellu mill produced paperboard for packing. It was difficult to market abroad and the situation became a financial burden in the mid-1970s. Metsäliitto’s solution was to integrate vertically to the

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cardboard case business; not only in Finland but also abroad. In 1981, Metsäliitto acquired the domestic Kotelonokia and in the following years the Danish Neopac and Greek Regis Finance B.V. Thus, the company’s internal problems essentially forced Metsäliitto to follow the same trend of international expansion that had motivated the other Finnish companies to go abroad already decades before (Lamberg, 2001a). After these initial actions, Metsäliitto started to expand rapidly into the European paper and pulp business. Especially in the early 1990s, the co-operative expanded in alliance with the Myllykoski company that was more experienced in international business. First joint operations were conducted in Germany in which the alliance acquired a strong position in magazine papers and paperboard. Later, Metsäliitto alone conducted similar actions in the tissue and sawmill business. At this point, the movement was driven by the relatively independent companies owned by Metsäliitto (Metsä-Serla / M-real, Finnforest, Metsä-Botnia etc.). In a way, the final step towards the ‘normal’ mode of forest business was the decision to start producing pulp outside the Finnish borders in the late 1990s and early 2000. The economic history of Finland has witnessed many unsuccessful business cases around the co-operative movement. Metsäliitto’s case, however, can be treated as a success story as it was able to develop from the marginal challenger to the important European player it was at the beginning of 2000. Especially prior the 1980s, its strategy was very consistent starting from the phase of geographic expansion (1947—1970) and continuing with the early internationalization and active alliance creation (1971—1985). After these initial phases, Metsäliitto’s strategy has followed the dominant industry trend yet including the basic principle to produce a variety of wood-based products to benefit its owner-members. And this ideological stance was the solid ideological basis for Metsäliitto’s growth strategy until the late 1990s. 5 COMPARING THE FINNISH FORESTRY COMPANIES The three Finnish forest industry companies have participated to the growth of the international forest industries. The level of production and sales grew fast after the Second World War, as can be detected from the Figure 5.2. Most of the growth occurred during the last decades of the 20th century. This was especially the case with Metsäliitto and UPM: 83 per cent of the combined post-war sales in these two companies was created during the 1980s and 1990s (Lamberg & Ojala, 2001). Even in the case of Kymmene, 70 per cent of the sales were created during these decades, though the calculations continue in its case only to 1995 when it was merged with UPM. The rapid growth during the 1990s can be only explained through mergers and acquisitions carried out during that period. The figure (5.2) also shows that the era of rapid growth seems to end – at least temporarily – during the first years of the 21stt century.

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100000 10000 1000 100

Kymmene

UPM

00 20

95 19

90 19

85 19

80 19

70

75 19

19

60

65 19

55

19

50

Enso

19

40

45

19

19

35

19

19

19

30

10

Metsäliitto

Sources: Annual Reports. Note: as the exchange rate USD/EUR the 12 month average rate (1.1312) is used. However, in 2003 the exchange rate between the euro and dollar varied a lot, the lowest rate being 1.0377 and the highest (at the end of the year) 1.2630. Statistics of Bank of Finland.
Figure 5.2. Net sales of Kymmene, UPM, and Metsäliitto 1930 2003, compared to Enso (def. 2003 million dollars, log.).

The Kymmene Corporation lost its position as the largest Finnish forest industry company from the interwar period onwards. Still in the 1920s the company produced around one third of the Finnish paper production, but after the Second World War the share was only one fourth. The company continued to loose its share up to the 1980s (Heikkinen, 2000). United Paper Mills caught Kymmene up during the 20th century. Still, even though the company made huge investments to production facilities, its share from the total sales of four leading companies (Enso, Kymmene, Metsäliitto, and UPM) remained at the stable one fourth level throughout the post war period. It was not until the creation of Repola and merger with Kymmene at the turn of the 1980s and 1990s when UPM really beat most of its domestic competitors in terms of sales and volume of production. Metsäliitto is even a more peculiar case: it started literally from scratch at the end of the 1930s, but succeeded to transform to a modern, world class paper manufacturing giant in just a couple of decades by establishing new units (alone or jointly with other companies), and lately by mergers and acquisitions. The merger with Serlachius put Metsäliitto side by side with the large forest industry corporations such as Enso, Kymmene, and UPM. 5.1 Investments The forest sector has always been one of the most profound investors in Finland: the share of the forest industry from the total industrial investments in Finland in

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1980—1996 was over one third (Diesen, 1998; Laurila, 1995, 1998; Laurila & Lilja, 2002). Christer Petersson suggests, that the success of the Finnish forest industry companies is in fact related to the enthustic investments to the new and best practice machinery and facilities (Peterson, 1996, 2001). The companies have sought for scale advantages. But at the same time the investments have indebted the companies, and as Markku Pohjola has suggested, has lead to serious financial problems (Pohjola, 1996). However, as Eero Artto states, even the over investments have been part of the key to success of the Finnish companies (Artto, 1985, 1995a; Artto & Juurmaa, 1999). 1600 1400 1200 1000 800 600 400

UPM

03

97

00

20

20

91

94

19

19

88

19

19

85

82

79

73

76

Ky mmene

19

19

19

19

70

Enso

19

19

67 19

61

64 19

19

19

58

200

M etsäliitto

Sources: Annual Reports.

Figure 5.3. Investments, Kymmene, UPM, and Metsäliitto, compared to Enso, 1959–2003 (def. 2003 dollars).

Also Ruuhela (1972) has stressed the variation in investments between the different years in the Finnish wood processing industry. He does not, however, see it as an implementation of a conscious strategy as Mintzber and Waters (1982) describe it (Mintzberg & Waters, 1982; Ruuhela, 1972). This can be also detected from the Figures 5.3 and 5.4. The major portion of the post war investments are dated to the 1980s and 1990s. Especially during the 1980s new machines were built. Also in international comparison Finnish companies invested actively during the 1980s. On the one hand, these investments caused problems with profitability in comparison with the international competitors. But on the other hand, the investments during the 1980s and early 1990s were the basis for the profitability of the Finnish forest industries during the latter part of the 1990s. (Diesen, 1998) For example, Kymmene invested in production of paper products with a high degree of processing during the 1980s. Unfortunately it was just these products that were most severely hit during the down turn in the early 1990s. The merger with Repola (United Paper Mills) was from this perspective a matter of necessity. Compared to the investments during the last decades of the 20thh century, the investments carried out through the 1950s up to the 1970s appears to be rather

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limited. (Figure 5.3). Still, compared to the sales of the companies, even the investments during these decades were remarkable (Figure 5.4). Especially Metsäliitto’s investments peaked in several years near to the 30 to 40 per cent from sales, which can be regarded as exceptionally high figures. However, especially during the 1970s and 1980s Metsäliitto invested with a lower rate compared to its domestic competitors. Unfortunately we do not have accurate figures from the early 1950s, when especially United Paper Mills and Enso invested heavily in new production plants.

UPM

03

97

94

00

20

20

19

19

91 19

88 19

85

82

79

73

76

Kymmene

19

19

19

19

70

Enso

19

67

19

64

19

19

61 19

19

58

50 45 40 35 30 25 20 15 10 5 0

Metsäliitto

Sources: Annual Reports.

Figure 5.4. Investments/sales, Kymmene, UPM, and Metsäliitto compared to Enso, 1948 1999 (per cent).

5.2 Profitability The average rate of return within the Finnish forest industry companies was at its highest level during the 1980s. At that time the average rate of return with Enso, Kymmene, UPM, and Metsäliitto was almost ten per cent. UPM and Metsäliitto succeeded fairly better than the other companies (Figure 5.5). The unrelated diversification can be regarded as the reason for the relatively good profitability of the Kymmene Corporation during the 1970s and 1980s. Quite ironically, the company’s profitability dropped in the early 1990s, just after it had focussed on the core competencies and sold most of the related and unrelated businesses (Lilius, 1992). United Paper Mills, on the other hand, was the best performer throughout the 1970s, 1980s and 1990s, though it also had certain problematic years that can be detected from Figure 5.5. The good performance of UPM was also noted in public discussion in the late 1980s, and the CEO of the company, Niilo Hakkarainen, has argued that it was actually used against the company’s good in merging processes; namely, companies with poor profitability were merged with UPM within the sphere

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in order save those companies (Hakkarainen, 1993; Mikkonen, 1989; Vesikansa, 1999).

20.0 15.0 10.0 5.0 0.0 -5.0 -10.0

Enso

Kymmene

00

20

95

90

19

85

19

80

19

75

19

19

70

19

65

19

60

55

19

50

19

45

19

40

19

19

35

19

19

30

-15.0

UPM

Sources: Annual Reports. Note: ROI-figures are highly arguable, since the accounting methods have changed over time and there are no clear and comparable financial statements until the beginning of the 1970s. (Näsi, 1990)

Figure 5.5. Return on Investment: Kymmene, UPM, and Enso, 1930 22003.

The fluctuations within the rate of return have been extensive. The best results were acquired during the 1980s and in the mid-1990s (Figure 5.5). As Eero Artto (1995b) has argued, the Finnish companies enjoyed the scale advantages in the late 1980s – the same advantages and concentration on certain products caused the rapid drop in profitability during the early 1990s. During the latter part of the 1990s companies produced again extensive profits, but the profits dropped again at the beginning of the second millennium. Also, during the 1970s the companies only seldom achieved even ten per cent return for invested capital. Finnish paper industry companies were highly indebted during the last decades of the 20th century. According to Eero Artto (1995) over 80 per cent of the capital of the Finnish companies was foreign in 1982 1992, whilst the same figure was around 60 per cent with the Canadian and Swedish firms, and below 40 per cent with the U.S. firms (Artto, 1995a). The proportionally high share of the foreign capital was due to the investments carried out during the period (Figure 5.3 and 5.4.). The investments are also shown in the shares of liabilities in the case companies’ balance sheet (Figure 5.6) and even more precisely in the share of credit capital from the net sales (Figure 5.7).

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90 80 70 60 50 40 30

Enso

Ky mmene

20

00

95

90

19

19

85

19

80

75

19

70

19

19

65

60

19

55

19

50

19

19

45

40

19

35

19

19

19

30

20

UPM

Sources: Annual Reports.

Figure 5.6. Share of the liabilities in the case companies’ balance sheet (per cent share), 1930—2003.

Enso

Ky mmene

00 20

95 19

90 19

85 19

80 19

75 19

70 19

65 19

60 19

55

19

50 19

45 19

40 19

35 19

19

30

200 180 160 140 120 100 80 60 40 20 0

UPM

Sources: Annual Reports.

Figure 5.7. The share of credit capital from the net sales 1930—2003 (per cent share).

The Figures 5.6 and 5.7 clearly show also the differences between the firms. Whilst Enso and Kymmene had throughout the century a relatively large own capital due to the forest ownership, the share of the liabilities from the balance sheet was lower than in the case of UPM, which did not have such a resource. This can be detected especially during the 1970s situation. However, after the merging operation at the

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turn of the 1980s and 1990s UPM also got larger forest resources and the share of liabilities from the balance sheet also dropped. But, if we look at the share of credit capital from the net sales (Figure 5.7) we get a totally different kind of picture: UPM’s liabilities were seemingly lower level compared to Enso and Kymi during the 1970s, 1980s and 1990s. Still, in the 1950s and 1960s UPM was more heavily indebted compared to its domestic competitors, due to the investments carried out during the period. However, one can not say that UPM was not an indebted company, on the contrary, it also had quite a high indebtedness rate compared e.g. to the producers in the United States (see Ahola, in this volume). The capital turnover has been lower in the Finnish and Swedish paper industry companies when compared with their North American competitors throughout the 1980s and 1990s (Artto, 1995a). This can be clearly detected from the Figure 5.8. At its lowest rate the capital turnover in Enso and Kymmene has been below two years and more. Again, this is related to the forest ownership both companies have had throughout the century. However, both UPM and Metsäliitto succeeded seemingly better in capital turnover; especially during the 1970s and 1980s both had turnover that was below one year. Metsäliitto, as described earlier, is a cooperative owned by the forest owners. Therefore, it does not have forest ownership that lowers the capital turnover. In the case off UPM, again, the capital turnover lowered in the early 1990s due to the mergers, and thus acquisition of forest land. Also, throughout the 1950s and 1960s UPM had seemingly lower capital turnover than its competitors due to the foreign capital in its balance sheet. An interesting figure is also the situation right after the Second World War, when all companies had reasonably good capital turnover. This was, of course, related to the post war situation where on the one hand companies had no possibilities to invest, and thus, had a low share of liabilities on the balance sheets. On the other hand, during the war especially Enso and Kymmene had lost remarkable areas of forest land and also production facilities to the Soviet Union. In the case of Kymmene the capital turnover was especially low. This was, as said, related to the forest ownership, but also to the indebtedness during the 1970s, 1980s and 1990s and to the diversified structure of the company. From the paper and pulp industry point of view, Metsäliitto and UPM were the most efficient ones in their capital turnover. They were not as vertically integrated as their competitors, and they had outsourced most of their raw wood acquisitions. The overall productivity increase in the paper and pulp industries has been extensive throughout the 20th century. This can be clearly detected from the labour productivity: only in 1980 to 1995 did the labour productivity increase to 2.5 fold. This was due to the technological development, and related to it the investments made by the companies. Furthermore, mostt Finnish forest industry firms (with the exception of UPM) have moved forwards in the production chain from e.g. sawmills to less labour intensive paper production. (Diesen, 1998; Lamberg & Ojala, 2001) Also the net sales produced by the employees increased around six-fold from the early 1960s up to the mid-1990s. (Figure 5.9)

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JARI OJALA AND JUHA-ANTTI LAMBERG 35 30 25 20 15 10 5

UPM

00 20

95 19

90

85

19

80

19

75

Kymmene

19

70

19

65

19

60

Enso

19

19

19

55

50

45

19

40

19

19

19

19

30

35

0

Metsäliitto

Sources: Annual Reports.

Figure 5.8. Capital turnover in the case companies in months (totall assets/sales*12). 0.45 0.40 0.35 0.30

Enso

UPM

99

96

19

93

19

90

19

19

87

19

84

19

81

19

78

75

Kymmene

19

72

19

69

19

19

66

19

63

19

60

19

57

54

19

19

51

19

19

48

0.25 0.20 0.15 0.10 0.05 0.00

Metsäliitto

Sources: Annual Reports.

Figure 5.9. Productivity in the case companies: turnover per worker 1948—2003 (million U.S. dollars, def. 2003 values).

The productivity growth has followed a similar pattern in all the Finnish companies analysed, and also in comparison to other Finnish forest industry companies during the time period (Ojala and Pajunen, in this volume). The similarity in the productivity growth refers to the similar competitive and institutional environment

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the companies were engaged in. Productivity growth is especially related to the similar technology used by the companies – indeed, e.g. the machinery was usually ordered from the same (domestic) suppliers. Still, one should bear in mind, that the share of the labour costs is relatively low in comparison to the other costs within the forest industries e.g. in the case of pulp mills, the labour costs produces only around three per cent of all costs, and in the paper mill the costs are below 14 per cent. The highest costs are induced from the raw materials, and in the case of paper factories from the energy. (Diesen, 1998; Lamberg & Ojala, 2001) 5.3 Strategic Activity The strategic behaviour of the three Finnish companies was fairly similar, as can be detected from the tables describing the strategic actions made by them. As regards to the intensity of the actions, the number off important action per year was fairly low (Tables 5.2, 5.3 and 5.4). For example, the Kymmene Corporation had in the 1950s only five actions that can be regarded as strategic. The activity, however, grew during the latter part of the twentieth century. Especially during the last period (1981 – 2000) the companies were fairly active: Kymmene and UPM had over three actions per year, whilst the number with Metsäliitto was still below two. This was mainly due the size of the companies: Metsäliitto was still a minor player compared to the other two. Table 5.2.

Period 1 Period 2 Period 3 Period 4 Total

Number of actions per period, average annual number of actions (actions/year in a period), and the share of joint ventures t per period, Kymmene Corporation. Years Number of actions 1904-1945 24 1946-1960 5 1961-1980 49 1981-1996 53 1904-1996 131

Actions/yearr Share of joint ventures 0.6 4 0.4 20 2.6 12 3.5 11 1.4 11

Sources: The database available at: http://www.cc.jyu.fi/~jaojala/.

Table 5.3.

Period 1 Period 2 Period 3 Period 4 Total

Number of actions per period, average annual number of actions (actions/year in a period), and the share of joint ventures per period, UPM. Years Number of actions 1920-1945 31 1946-1960 15 1961-1980 39 1981-2000 65 1920-2000 150

Actions/yearr Share of joint ventures 1.2 23 1.1 20 2.1 10 3.4 12 1.9 15

Sources: The database available at: http://www.cc.jyu.fi/~jaojala/.

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Table 5.4.

Period 1 Period 2 Period 3 Period 4 Total

Number of actions per period, average annual number of actions (actions/year in a period), and the share of joint ventures per period, Metsäliitto. Years Number of actions 1934-1945 1 1946-1960 8 1961-1980 12 1981-1996 27 1920-1998 48

Actions/yearr Share of joint ventures 0.1 0 0.6 13 0.6 0 1.6 7 0.8 6

Sources: The database is available at: http://www.cc.jyu.fi/~jaojala/.

Cooperative capitalism in chandlerian terms has been regarded as the dominant form also in Finnish business history up to the 1990s. This can be detected also from the strategic actions made by the companies. Especially UPM has been cooperative by nature: around 15 per cent of the actions were joint ventures. Both in the case of Kymmene and UPM the share of joint ventures has, however, dropped constantly during the post war period. An interesting feature is that Kymmene was not keen on cooperative actions during the first part of the 20th century. That was due to the size of the company: it had e.g. its own sales units and thus, avoided the most visible cooperative functions, namely, sales associations. The lack of cooperative moves with Metsäliitto is related to totally opposite reasons. To put it simply: the company was willing to cooperate, but the other Finnish companies were not keen on its attempts. This was due to the ownership off the company; as a cooperative owned by the forest owners the company was regarded as disturbing the markets, with the only objective to raising the price of lumber. The end products have gained more essential role within the companies strategic actions. The actions moved slowly forwards within the production chain; from raw materials to sawmills, pulp, paper, and lastly, to converted paper products and marketing. In the actions made by Kymmene (Table 5.5) the role played by the saw mills dropped from 17 per cent in the first period to only two in the last. Especially the actions within the marketing gained more importance in the company’s strategy during the post war period. As stated a number of times before, United Paper Mills concentrated especially on paper production. This can be clearly seen also from the strategic actions carried out by the company during the 20th century (Table 5.6). Only in the first and last periods was there a bit higher proportion of actions with pulp producing. The other line of business besides the paper products, however, has been in the case of UPM converted paper products, especially after the Second World War. Already by the early 1930s a paper product unit Paperituote was created by the company. At first, the unit produced e.g. sacks and envelopes. During the 1950s and 1960s the company even acquired production facilities from aboard from competing businesses. At that time most of the converted products were exported to the Soviet Union. After paper products company Haarla was merged with UPM in 1976, the converted products got an even more pronounced role in the company’s product portfolio. (Eloranta & Ojala, 2005; Nordberg, 1980, 1998; Annual Report of UPM 1976; 1979; 1980)

KYMMENEE, UNITED PAPER MILLSS, AND METSÄLIITTO Table 5.5.

135

Kymmene’s strategic actions in the value chain. Percentage of strategic actions per period.

1. Raw materials (timberland etc.) 2. Sawmills 3. Pulp (mechanical and chemical) 4. Paper 5. Paperboard 6. Panel, plywood, veneer 7. Paper and board converting 8. Marketing and distribution 9. Other related 10. Multiple categories 11. Unrelated business Total

Period 1 Period 2 Period 3 Period 4 0 0 4 0 0 0 9 10 17 20 9 2 57 0 30 28 0 0 0 2 0 0 0 8 0 0 0 4 9 0 17 10 0 0 2 0 4 20 9 10 13 60 20 26 100 100 100 100

Total 2 7 8 33 1 3 2 12 1 9 23 100

Sources: The database is available at: http://www.cc.jyu.fi/~jaojala/.

Table 5.6.

UPM’s strategic actions in the value chain. Percentage of strategic actions per period.

1. Raw materials (timberland etc.) 2. Sawmills 3. Pulp (mechanical and chemical) 4. Paper 5. Paperboard 6. Panel, plywood, veneer 7. Paper and board converting 8. Marketing and distribution 9. Other related 10. Multiple categories 11. Unrelated business Total

Period 1 Period 2 Period 3 Period 4 3 0 0 2 3 7 3 7 17 7 8 13 23 33 21 37 3 0 8 0 0 7 0 2 0 20 28 18 3 0 0 3 0 0 5 5 3 0 3 0 43 27 26 13 100 100 100 100

Totall 1 5 11 28 3 1 17 2 3 5 23 100

Sources: The database is available at: http://www.cc.jyu.fi/~jaojala/.

Metsäliitto integrated its production most notably forwards within the production chain (Table 5.7). Whilst the company was at the beginning foremost a lumber trader the roundwood trade was for a long time vital in its operations. However, the proportional importance of the lumber trades diminished during the 1970s and 1980s (Huolman, 1992; Zetterberg, 1983). Metsäliitto integrated sawmilling during period two, and then during the next period paper production. Evidently it even integrated paper products during the last period, as can be detected from Table 5.7.

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Table 5.7.

Metsäliitto’s strategic actions in the value chain. Percentage of strategic actions per period.

1. Raw materials (timberland etc.) 2. Sawmills 3. Pulp (mechanical and chemical) 4. Paper 5. Paperboard 6. Panel, plywood, veneer 7. Paper and board converting 8. Marketing and distribution 9. Other related 10. Multiple categories 11. Unrelated business Total

Period 1 Period 2 Period 3 Period 4 100 38 0 0 0 25 17 12 0 13 8 8 0 0 25 27 0 0 8 0 0 13 8 0 0 0 0 19 0 0 17 4 0 0 0 0 0 13 17 27 0 0 0 4 100 100 100 100

Total 9 15 9 21 2 4 11 6 0 21 2 100

Sources: .The database available at: http://www.cc.jyu.fi/~jaojala/.

The companies sought for growth. This can be detected from the fact that around three fourths of the strategic actions made by Kymmene and UPM and over 90 per cent made by Metsäliitto were related to growth, either through acquisitions and mergers or through investments (Tables 5.8, 5.9 and 5.10). The share of selling and closing units, however, increased through time. This was related to the strategy change in the 1970s and 1980s: companies now started to either sell or close related and unrelated units, and concentrated on the core competencies instead. The growth strategies of the three companies developed similarly. Namely, whilst the first three periods were the time of organic growth, during the last period the growth was sought especially through mergers and acquisitions (Tables 5.8, 5.9 and 5.10). Again, Metsäliitto is seemingly different during the first periods, but fits in to the pattern within the last two periods. Similarly, the selling and closing actions rose in all companies during the last decades. This was especially evident in Kymmene and UPM: the first divested its unrelated businesses, whilst the latter also reformulated the organisation by selling the remaining related businesses and concentrated on the core competencies. Table 5.8.

Acquire, build, sell, and closure actions of Kymmene, per cent

Period 1 Period 2 Period 3 Period 4 Total

Acquire 38 40 24 32 31

Build d Togetherr 54 92 60 100 63 88 21 53 44 75

Selll 0 0 8 38 18

Close Togetherr 8 8 0 0 4 12 9 47 7 25

Sources: The database available at: http://www.cc.jyu.fi/~jaojala/.

Total 100 100 100 100 100

KYMMENEE, UNITED PAPER MILLSS, AND METSÄLIITTO Table 5.9.

137

Acquire, build, sell, and closure actions of UPM, per cent

Period 1 Period 2 Period 3 Period 4 Total

Acquire 16 33 21 38 29

Build d Togetherr 81 97 67 100 41 62 34 72 49 77

Selll 0 0 21 18 13

Close Togetherr 3 3 0 0 18 38 9 28 9 23

Total 100 100 100 100 100

Sources: The database available at: http://www.cc.jyu.fi/~jaojala/.

Table 5.10. Acquire, build, sell, and closure actions of Metsäliitto, per cent

Period 1 Period 2 Period 3 Period 4 Total

Acquire 0 75 42 70 63

Build d Togetherr 100 100 25 100 58 100 19 89 31 94

Selll 0 0 0 11 6

Close Togetherr 0 0 0 0 0 0 0 11 0 6

Total 100 100 100 100 100

Sources: The database available at: http://www.cc.jyu.fi/~jaojala/.

The markets for the products for all the companies were mainly abroad. However, the production remained mainly domestic up to the end of the 20th century. This can also be detected from the strategic actions (Tables 5.11, 5.12, and 5.13). Though Kymmene made its first internationalisation actions already during the first period and UPM established first plants abroad during the 1950s, these were still rather small steps. It was not until the third period when the internationalisation gained more importance in all three companies. Both Kymmene and UPM had proportionally more international actions in the third period (namely during the 1960s and 1970s) than during the fourth period. Still, the actions carried out during the fourth period were much larger, including major acquisitions and mergers. Table 5.11. Domestic and international actions of Kymmene, %.

Period 1 Period 2 Period 3 Period 4 Total

Domestic 92 100 53 75 71

Internationall 8 0 47 25 29

Together 100 100 100 100 100

Sources: The database available at: http://www.cc.jyu.fi/~jaojala/.

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Table 5.12. Domestic and internationall actions of UPM, %.

Period 1 Period 2 Period 3 Period 4 Total

Domestic 100 73 56 72 74

Internationall 0 27 44 28 26

Together 100 100 100 100 100

Sources: Database available at: http://www.cc.jyu.fi/~jaojala/.

Table 5.13. Domestic and international actions of Metsäliitto, %.

Period 1 Period 2 Period 3 Period 4 Total

Domestic 100 100 83 70 79

Internationall 0 0 17 30 21

Together 100 100 100 100 100

Sources: Database available at: http://www.cc.jyu.fi/~jaojala/.

6 CONCLUSIONS At least four typical features can be found for the Finnish forest industries as a whole during the 20th century. Firstly, the markets were abroad. Secondly, integration forwards within the production chain. Thirdly, the Finnish forest industry has mainly been diversified and vertically integrated. Most of the companies have had forest ownership, they have engaged in sawmill businesses, as well as in pulp and paper production. The fourth important feature is the sales associations that played an important role in marketing up to the end of the century. Due to these associations the domestic competition has been somewhat limited and, in fact, internationally Finnish forest industry firms were regarded as one. Metsäliitto has grown, compared to the other companies in this article, with more limited resources. The company was engaged in several branches of forest industries, but never diversified in to unrelated areas as the other companies did. This was, probably, due to the ownership structure: the company was owned by the forest owners who were, thus, interested only in the forest industry sector (Lamberg, 2001a). Thus, the investments carried by the company were concentrated in the core businesses. Kymmene Corporation was one of the largest industrial enterprises in Finland throughout the 20th century. This was its strength, but also weakness. The company lost its relative position throughout the century, and the merger with United Paper Mills can be regarded as the end of the independent Kymmene. The company was a paper producer throughout the century, though it had both related and unrelated diversification. Growth strategies of Kymmene included both organic growth and mergers and acquisitions. Furthermore, best practise technology was also one notable historical strategy of the company – both in the early years as in the last

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decades of the century. The company sought the benefits off vertical integration by acquiring both forest land, pulp and paper production and independent marketing. United Paper Mills had seemingly different strategies compared to the other two. Whilst Metsäliitto and Kymmene sought to cover the whole production chain either by integrating forwards (as Mestäliitto did) or both back- and forwards (as Kymmene did), United Paper Mills concentrated only on paper and converted paper products. Deterministically we might argue that the strategy choices made by UPM seem to be “modern”. Though, one has to remember that most of the choices were made as matters of necessity, and only afterwards they proved to be advantageous to the company. UPM sought for the growth through expansive investments – still the most significant growth periods can only be understood through acquisitions and mergers. UPM succeeded in avoiding vertical integration as well as unrelated diversification.

CHAPTER 6

STRATEGY FORMATION IN THE SWEDISH FORESTRY INDUSTRY: COMPARING SCA AND MODO ANDERS MELANDER Jönköping International Business School e-mail: [email protected]

1 INTRODUCTION SCA and MoDo have been two of the most important actors in the Swedish forest industry in the 20th century. Modo represents a family-owned and family-managed company with long traditions. The company has survived several threatening situations as management was willing to take on challenges and initiate adventurous ventures. However at the end of the 1980s management took on one challenge too many, resulting first in the family losing control of the company and eventually the company losing its independence. SCA illustrates a different role in the development of the industry. SCA was founded at the end of the 1920s when financial crises opened up an opportunity to restructure the forest industry. After a stumbling beginning the company gradually became one of the most influential actors in the industry. Especially since the late fifties and onwards the company is recognized as the leading pulp and paper company in Sweden. To understand the strategy formation processes in these two companies it is vital to apply a perspective characterized by a longitudinal, processual and holistic approach (Pettigrew, 1987). The problem, however, is how to fulfill these ambitions, especially within the format of a paper! In this paper the choice is to first provide the reader with a brief longitudinal overview of the historical developments. This overview is then extended into a qualitative and a quantitative part. The qualitative part is a summary of the major strategic actions undertaken in the two companies for the periods of 1955-2000 (SCA) and 1945-1999 (MoDo). The quantitative overview includes the relevant parts from the companies’ profit and loss statements and the balance sheets spanning the years 1960-2000 (SCA) and 1945-2000 (MoDo). 141 Juha-Antti Lamberg, Juha Näsi, Jari Ojala, and Pasi Sajasalo (eds.), The Evolution of Competitive Strategies in Global Forestry t Industries: Comparative Perspectives, 141–165. © 2006 Springer. Printed in the Netherlands.

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Following the descriptive overview, an analysis of the evolutionary paths is conducted (i.e. the strategic path; see Lamberg, in this volume). This analysis highlights a) actions taken in the production chain, b) the arena in which the actions are taken and c) the type of actions taken. The final section of this paper includes a more detailed analysis on one vital strategic action in each of the two companies. Through the more extensive presentation of the two actions the aim is to reach a further understanding of both the driving forces and the process behind these specific actions. Further, by adding an analysis of how the actions in the two companies were related as well as how the two companies’ actions were related to the general development of the industry as a whole, a more contextual understanding of the strategy formation is promoted. 2 THE QUALITATIVE OVERVIEW – STRATEGIC ACTIONS IN SCA AND MODO 2.1 SCA’s history in brief Ivar Kreuger, the famous safety-match-monopolist, is the architect behind SCA (The Swedish Pulp Corporation). His industrial logic aimed at building industrial monopolies, and in line with this he identified an opportunity for a single large company to dominate the pulp market in 1929. Due to his financial problems Kreuger committed suicide in 1932, and all his companies were liquidated and the banks took over control. As a result of this the early history of SCA (1929-1947) was characterised by financial and ownership issues. In the period 1947-1954 an integrated company was eventually created. The leading character in this latter period was Axel Enström (CEO 1950-1960). His idea was to unite the company and take advantage of all possible large-scale effects. The period was characterised by high profitability and expansion, an expansion that without doubt was inspired by the industrial development in the United States. In 1961, a long-term strategic plan was formulated. This plan strongly emphasised that the shortage of wood in the north of Sweden was the main obstacle to future expansion within Sweden. Accordingly, the future strategy was to continue to add value by integrating the production of pulp with the production of paper, and to promote an expansion abroad to increase sales. These lines of development also characterised the 1960s in which Eije Mossberg was the CEO of SCA (1960-1972). Those twelve years became a period of major a restructurings, and in total some 18 units were closed down at the same time as capacity increased substantially in the remaining units. Those were years in which SCA also constructed a pulp mill in North America and made major investments in central Europe. Further, SCA invested in a revolutionary transport system, substantially reducing the costs for transportation between Sweden and West European markets. By the end of the 1960s the market situation was tough, and SCA experienced a loss for the first time since the Second World War. The new CEO, Bo Rydin (19721988), welcomed the upturn in the economy in the early 1970s. At that time SCA undertook one of the most important m strategic actions as consumer products became an important business area. It was argued that the new business area, Mölnlycke,

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offered a shortcut to increased growth, and SCA estimated that growth in consumer products could secure a continuous utilisation of the traditional production of pulp. The Swedish pulp and paper industry experienced the most severe downturn in the second half of the 1970s. SCA, while implementing a rather careful investment policy in the early 1970s, rode this downturn out successfully. A result of the downturn was that an industry-wide wave of acquisitions took place in the early 1980s, a wave that continued abroad in the second half of the 1980s. SCA took part in the international acquisition wave, culminating in 1988 in what Andersson (1993) claims was one of the most eventful years in the history of SCA. The major acquisitions abroad were Laakirchen (Austria), Italcarta (Italy) and Peaudouce (France). Of those acquisitions Peaudouce stands out, making SCA one of West Europe’s largest supplier of hygiene products. In 1988 Sverker Martin-Löf succeeded Bo Rydin. Martin-Löf (CEO 1988-2001) continued the international wave of acquisitions with the major acquisition of Reedpack (England) in 1990. The acquisitions strengthened SCA’s three large product areas, consumer oriented products (mainly hygiene products), packaging paper (mainly corrugated board) and graphic paper (newsprint, printing and writing paper). After the long upturn in the economy, 1991 was the beginning of a recession. SCA, as all Swedish pulp and paper companies, focused on internal rationalisation, reorganisation and downsizing. During the period 1991-1993 approximately ten per cent of employees in the Swedish pulp and paper industry were laid off. In 1992/93 SCA announced a new strategy of alliances in product development and production; companies involved were Weyerhaeuser (the US), Uni-Charm (Japan), and Mondi Paper (South Africa). These alliances were one sign of the new climate in the pulp and paper industry. The belief in collaboration between domestic producers in issues such as technological development, price fixing, public information, lobbying and international trade barriers gradually faded, leading to open-mindedness concerning cross-border initiatives. In 1994 optimism returned to the pulp and paper companies. The gloomy view of the future predicted in the early 1990s was quickly reversed as demand increased. The industry announced investments for more than 13 billion SEK within Sweden. SCA contributed to some of the largest projects. The rebuilding of their oldest mill in Ortviken signalled a continuing belief in Sweden as an industrial country. 2.2 MoDo’s history in brief In 1872 MoDo was founded in Örnsköldsvik (Ö-vik), a small town in northern Sweden. The founder was JC Kempe, who in 1836 bought a sawmill originally built in 1779. The mill was situated in Mo just outside Ö-vik. Following a shaky beginning characterised by a number of diversified operations, the company focused on its sawmill operations by the late 19th century. As manufacturing of pulp became a growing business, the decision was taken at the beginning of the 1900s to add the production of pulp to existing saw mills. The production of sulphite pulp was first started at a sawmill in Domsjö (also outside Övik).

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Franz Kempe (the son of JC Kempe) resigned in 1916 and his son, Carl Kempe, was appointed CEO of the company. Carl Kempe stayed in the post until 1949 and thereafter he was chairman of the board until 1965. Carl Kempe, with a total of 59 years in the company, is regarded as the architect behind MoDo’s modern operations. His strategy was to build a major pulp operation at the two main sawmills in Domsjö and Husum. Carl Kempe was also a firm believer in the idea of an organically based chemical industry as a means of adding more value to the basic operation, i.e. the production of pulp. Immediately after the Second World War the main issue in the industry was how to improve the supply of timber to existing pulp mills. By tradition, MoDo did not own the inputs for production and therefore relied on purchased timber. As all general forecasts predicted a severe supply problem in the future, the steady supply of timber became a question of long-time survival for the company. As Bengt Lyberg (non-family) took over as CEO in 1959, the major issue of how to secure the supply of timber was still unresolved. However, in the early 1960s the company started to plan for a future that did not rely on the chemical industry as the most important way of growing the company’s assets. In 1965 Matts Carlgren (the son of Franz Kempe’s daughter) was appointed chairman of the board after Carl Kempe’s resignation. Carlgren was the most influential person in the company until 1991, occupying the posts of CEO and/or chairman of the board during the entire period. 1965 was also the beginning of a strong renewal in the company. As a result the chemical operation was sold in 1972 and the company turned its focus on the office paper market (also named fine paper). New and at the time large and technically advanced machines were built at the Husum mill (1969, 1974 and 1984). These machines together with the complementary structure (several minor mills and a merchant business) made MoDo an important actor in the growing office paper sector. Moreover the renewal also included a second business area, hygenic paper and products (mainly diapers). The growth of these operations included international and domestic acquisitions (including the domestic company Stille-Werner) as well as organic growth. In 1980 the Kempe family owned about 27% of the capital and 45% of the votes in the company. Further, following a long tradition, Svenska Handelsbanken owned some 3% of the votes in the company. At this time the prospects for the office paper market were declining and the company was in search for products that would supplement the two major business areas (office paper and hygiene). As a result an offer was made in 1980 to acquire Iggesund, a successful one-mill company with a profitable niche product (white bleached cardboard of high quality). In 1983 MoDo finally gained control of Iggesund after a long process in which other actors tried to interfere. Among other things this struggle over Iggesund mirrors the importance of the two banking spheres in Sweden (Svenska Handelsbanken and SEBanken/Wallenberg) (Ericsson, 1991). In the 1980s MoDo operated in three business areas: office paper (the heart), hygiene products/paper and cardboard. The need for investments in all these areas led management to realize that they had to prioritize. In 1987 the hygiene operations were sold to Holmen. To most actors’ surprise, later that same year MoDo acquired

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all of Holmen (hygiene and newsprint) and later in 1989 sold Holmen’s and MoDo’s combined hygiene operations to Metsä-Serla (Finland). The result for MoDo was a change from hygiene products/paper with large capital requirements to a new business area: newsprint paper, hitherto successfully operated by Holmen for a long time. The large acquisitions made in the 1980s strained the company’s capital base. Matts Carlgren’s (then CEO) way to solve the problem was to by some of the shares in Iggesund himself. However, the high interest rates in Sweden in 1990 made him unable to pay interest on the private loans needed to finance that deal. As a result he was forced to sell not only the shares in Iggesund but also his shares in MoDo. At the same time one other major owner in the company decided to sell to SCA. The result was that the Kempe family lost control of the company. In 1991 SCA owned about one third of MoDo, the founding family (Kempe) owned approximately one third and a new owner, Lundberg, owned about one third. At this time several attempts were made by SCA to make the two companies cooperate. The obvious idea was to merge office paper operations as well as newsprint operations. After the initiatives had been rejected repeatedly, SCA decided to sell their shares to Lundberg AB. As a result Lundberg (a family-run real estate and construction company) took control of MoDo. In the following years a core business strategy was implemented; and some parts of the operations were sold, and in 1999 MoDo and SCA merged office paper operations. The combined operations became the core of a new company, MoDo Paper. As a result of these structural changes the remaining parts of MoDo (i.e. newsprint and cardboard) changed name to Holmen.

3 THE QUANTITATIVE OVERVIEW – THE FINANCIAL GROWTH OF MODO AND SCA In this quantitative overview some key financial indicators are summarised. All figures are in constant value (1995) and in U.S. dollars (exchange rate 7.15 SEK/US dollar). Due to changes in the fiscal yearr the value for 1957/1958 and 1968/1969 is not correct. The accounting principles from 1983 and onwards have been used for the entire period, which mainly affects the relation between equity capital and debt capital.

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4500 4000 3500 3000 2500 2000 1500 1000 500

97 19

93

89

19

19

19

85

81 19

19

77

73 19

69 19

19

65

61 19

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Figure 6.1. MoDo’s Turnover 1945-2000. (def. million dollars.)

The most obvious change in turnover took place in 1988, the yearr in which Holmen was acquired by MoDo. In subsequent years several operations that were formerly a part of Holmen were divested. The peak in 1969 is due to a change in accounting periods, and the peak in 1974 reflects the extreme market situation in that year.

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1990s is due to the financial problems thatt faced Sweden as well as most pulp and paper companies.

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MoDo’s profit growth is difficult to illustrate in a graph. Profitability was low at the end of the 1960s. In the 1970s changes are more radical. In 1972-1974 Swedish pulp and paper companies experienced an economic boom. This was soon to change. In 1976-1978 MoDo as well as most of the companies dealing with semi-finished products suffered from a combination of Swedish industrial policy and an international recession. In 1980/81 the company suffered from a general Swedish recession and in 1982/1983 it benefited from the devalued Swedish currency. d into the late 1980s. Again in 1991, The effects of the devaluation reverterated MoDo with international loans suffered from Swedish monetary policy. As Sweden changed its monetary policy the situation improved drastically in the remaining years of the 1990s. SCA’s operating profit follows MoDo in a general sense. It is, however, obvious that SCA’s operating profit is not as cyclical as MoDo’s. The difference is most recognisable in the period 1970-1990, a period in which SCA benefited from its large operations in the consumer area (Mölnlycke).

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Reviewing the return on investment the same pattern as above appears in the latter parts of the period. However, here we also see major shifts in the earlier parts. For instance in 1951 MoDo benefited highly from price increases due to the Korean crisis.

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Figure 6.7. MoDo Employees (left axis) and Productivity (right axis), 1945-20001.

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In 1969 there is a sharp increase in the number of employees due to the fact that forest workers from that year are included in the total number of employees.

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start up of paper production at the Husum mill. As further machines were built, productivity increased. Changes in the 1980s are mainly due to the acquisition of Holmen in 1987 and the further restructuring of the company. 40000

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Figure 6.8. SCA Employees (left axis) and Productivity (right axis), 1960-2000.

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Figure 6.9. MoDo Investments (left axis) and Investments/Turnover (right axis), 1956-2000.

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Two patterns are evident in this graph. The first is that gradual investment increases coincide with turnover. The second pattern is that when investments are related to operating profit (Figure 6.2) MoDo follows what is arguably a traditional cyclical pattern in the industry, i.e. high profit in the first year results in high investments in the following year and as a result new capacity is introduced when the next recession has arrived (cf Klint, 1985).

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Figure 6.10. SCA Investments (left axis) and Investments/Turnover (right i axis), 1960-2000.

In SCA investments increased heavily in absolute figures in the later decades. However, when investments are related to turnover they decreased from a peak in the 1960s to a rather modest 5% annually in the 1990s. This was partly due to the size of the company. In the 1990s SCA’s turnover was more than twice that of MoDo reducing the impact of a new machine, for approximately 280-300 million U.S. dollars, on the investment/turnover ratio considerably.

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Figure 6.12. SCA Capital Turnover, 1960-2000 (months).

Somewhat surprisingly, SCA’s capital turnover decreased in the period 1960-2000. MoDo maintained a higher turnover. MoDo’s somewhat different pattern is mainly due to the adventurous investments made, investments that, for instance, included special co-financing of investments (e.g. installing new machines, takeovers) from financial companies.

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4 STRATEGIC ACTIONS IN SCA AND MODO IN ANALYSIS Lamberg (2005, in this session) outlines the framework to be used in analysing the strategic actions undertaken by these companies. Further, as the reader may have noticed, the categorisation of each action, the time periods used and the coding procedure of the actions are discussed in detail in the appendices of the book. Here only a summary of these classifications is presented. This framework consists of four parts. 1 In the first part (Tables 6.1 and 6.2) we summarise the number of actions per period, the average number of actions every year and the share of joint ventures. A more extensive presentation of the actions is to be found in the appendices of the book. 2 In the second part (Tables 6.3 and 6.4) we focus on how the company changes position in the production chain over time. The actions have been categorised according to what ffunctional business area the action is concerned with. Thus 1 stands for the lowest value added (raw material). 3 The third part (Tables 6.5 and 6.6) focuses on the nature of the action and how it is related to other companies, i.e. is the action a part of organic growth or an acquisition strategy and is the action undertaken in collaboration with another company or not? 4 The fourth part (Tables 6.7 and 6.8) focuses on where the actions are undertaken. Are they undertaken in the home country or abroad? The analysis of strategic actions is divided into four time periods. The first period is between 1900 and 1945, although the data used in this paper unfortunately does not cover this period. The second period is 1945-1960, the third 1961-1980 and the fourth 1981-2000. 4.1 The first part – a summary of actions per period Table 6.1.

Period 2 Period 3 Period 4 Total

Number of actions per period, average number of actions/year in a period, and the share of joint ventures per period, SCA. Years Number of actions 1945-1960 18 1961-1980 35 1981-2000 45 1945-2000 98

Actions/yearr Share of joint ventures 1.2 6 1.8 17 2.4 16 0.7 14

Source: The database available at: http://www.cc.jyu.fi/~jaojala/.

Table 6.2.

Period 2 Period 3 Period 4 Total

Number of actions per period, average number of actions/year), and the share of joint ventures per period, MoDo. Years Number of actions 1945-1960 15 1961-1980 26 1981-2000 39 1945-2000 80

Actions/yearr Share of joint ventures 1.0 20 1.4 4 2.1 5 0.5 8

Source: The database available at: http://www.cc.jyu.fi/~jaojala/.

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4.2 The second part – the position in the production chain Table 6.3.

SCA’s strategic actions in the value chain. Percentage of strategic actions per period.

1. Raw materials (timberland etc.) 2. Sawmills 3. Pulp (mechanical and chemical) 4. Paper 5. Paperboard 6. Panel, plywood, veneer 7. Paper and board converting 8. Marketing and distribution 9. Other related 10. Multiple categories 11. Unrelated business Total Table 6.4.

Period 2 Period 3 Period 4 0 9 4 6 11 2 22 20 2 6 17 24 11 17 22 0 0 0 0 6 18 0 3 0 0 0 0 56 9 13 0 9 13 100 100 100

Total 5 6 12 18 18 0 10 1 0 19 9 100

MoDo’s strategic actions in the production chain.

1. Raw materials (timberland, etc.) 2. Sawmills 3. Pulp (mechanical and chemical) 4. Paper 5. Paperboard 6. Panel, plywood, veneer 7. Paper and board converting 8. Marketing and distribution 9. Other related business 10. Multiple categories 11. Unrelated business Total

Period 2 Period 3 Period 4 20 23 5 7 15 5 33 8 15 7 23 23 0 4 8 0 0 0 0 19 8 0 4 5 0 0 0 13 0 18 20 4 13 100 100 100

Total 14 9 16 20 5 0 10 4 0 11 11 100

From this analysis it is obvious that both companies have been involved in activities aimed at a forward vertical integration. In period two the main focus was on semifinished products, and in the later periods attention shifts to finished products (categories 3-7). SCA has a heavy emphasis on paper production (3) in period two and builds a second leg with investments in cardboard and sheet production (4, 5) in periods three and four. In period four a focus on converting is noticeable (7). MoDo follows the same pattern. The difference is that the initial investments in paper (3) is followed by an emphasis on tissue and cardboard in the next periods. The high figure in period three for packaging and converting is related to the investments in tissue production. In the MoDo case the high number of actions related to several business areas (10) in period four reflects a turbulent time in which several large acquisitions and divestments were made.

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4.3 The third part – the nature of the action in relation to other companies Table 6.5.

Period 2 Period 3 Period 4 Total Table 6.6.

Period 2 Period 3 Period 4 Total

Acquire, build, sell, and closure actions by SCA, %. Acquire 40 48 55 51

Build d Togetherr 40 80 18 67 26 82 25 75

Selll 0 9 18 12

Close Togetherr 20 20 24 33 0 18 12 25

Total 100 100 100 100

Acquire, build, sell, and closure actions by MoDo, %. Acquire 17 62 29 38

Build d Togetherr 67 83 15 77 26 54 29 67

Selll 0 4 26 14

Close Togetherr 17 17 19 23 20 46 19 33

Total 100 100 100 100

Analysing offensive and defensive actions and the nature of these actions in Table 6.5 tells us that SCA has been offensive in all periods. The relatively high share of closing of units in period three indicates that this was a period of tough efficiency engineering. In that period the company experienced the only year with red figures in the entire post world war two period. MoDo (Table 6.6) follows the same pattern as SCA. The relatively high number of sellings and closures in period four indicates that this was a turbulent period in which a number of large acquisitions were followed by divestments. Companies acquisitions and building new units, one has to take into account that a large portion of the acquisitions were rather small (converters, etc.) and often a way of buying market share in countries outside Sweden. The units built were on other hand in most cases large investments in new machines or even green-field investments. Further, the distribution between selling and closing indicates that in the two first periods (2 and 3) the companies closed old mills in order to streamline production and increase efficiency in the raw material flows. In later periods the number of sellings increases, which is due to the fact that the companies acquire large competitors in which some business areas are later divested. 4.4 The fourth part – the type of action Table 6.7.

Domestic and international actions by SCA, %.

Period 2 Period 3 Period 4 Total

Domestic 100 71 53 68

Internationall 0 29 47 32

Together 100 100 100 100

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Table 6.8.

Domestic and internationall actions by MoDo, %.

Period 2 Period 3 Period 4 Total

Domestic 100 85 77 84

Internationall 0 15 23 16

Together 100 100 100 100

In these tables the pattern is obvious. The two companies became more internationally oriented in the later periods. Still, however, the number of actions that are domestically oriented is surprisingly high in the later periods. The figures also indicate that SCA is moving ahead of MoDo in internationalisation. Focusing on the type of action, it is apparent from the frequency tables that both companies are highly focused on acquiring and divesting units as a way to develop their businesses. In period two MoDo formed alliances mainly to manage a threatening shortage of timber in Sweden. Except for those early alliances, it is not until the third period that mergers and alliances enter the portfolio of tools. At that time, SCA explicitly aimed to increase its international expansion by forming alliances. The change in period four is that the object of the alliances changes from production to research and development. A further difference is that in period four alliances are formed with companies operating in Asia and the USA, i.e. globalisation continues. 5 VIGNETTE 1 – SCA’S ACQUISITION OF MÖLNLYCKE One of the most important strategic actions taken by SCA is the acquisition of Mölnlycke in 1975. The background of the acquisition is presented below together with the consequences for the company. This strategic action can be traced back to 1963 when SCA’s researchers developed a product useful for female sanitary protection. In the 1960s, business grew as demand increased. At the beginning of the 1970s, a choice had to be made. Should SCA continue investing in hygiene products, or should the company concentrate on the forest sector? (Haslum, 1993, p. 183). The hygiene operation was sold to Mölnlycke in 1973. “If we were to continue our operations within this sector, we would be faced with extremely high costs for product research and marketing development; these resources could, I feel, be put to better use within the forest industry.” (Rydin, SCA-Tidningen May 1973)

At the annual shareholders’ meeting in 1973, a strategy for expansion in the forest sector was outlined. This was to leadd to a substantial increase in production, but only a marginal increase in wood consumption. The latter was to be achieved through closures of old units and the adoption of more efficient forestry methods (Rydin, SCA-Tidningen May 1973). The divestment of the hygiene operation was part of this strategy. The emphasis on continuous forward integration was still part of the overall strategy as SCA became a part-owner of Mölnlycke and thus, the

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future supplier of pulp to an expanding hygiene business sector. The collaboration between the two companies continued, and in 1975 a new solution was reached when SCA took control of Mölnlycke. In 1974, 72% of turnover came from the hygiene sector in Mölnlycke. Other product areas were textiles, boats and sewing threads. The company had grown quickly in the last few years and all forecasts pointed to a continued rapid growth in the coming years. This was necessary, as costs for marketing and research were high (Mölnlycke, Annual Report 1973, 1975). At the same time, SCA, as all other pulp and paper companies, “lived in the shadow of wood scarcity” (SCA-Tidningen, 1975). High profits were made in 1974 but long-term prospects in traditional product areas seemed to be limited. Mölnlycke offered a shortcut to increased growth. Furthermore, it was calculated that Mölnlycke’s growth could increase the demand for pulp, and in this way guarantee a continuous outlet for the production of pulp, thus providing increased resilience against fluctuations in business cycles. “As all other forest industry companies during the last 10 years SCA’s profitability has been very uneven, because we are what are known as “cyclical companies” i.e. those extremely exposed to, and dependent upon the business cycles. One of the reasons for our merger with Mölnlycke was to be able to “even out” our profitability figures.” (Browald, 1975)

And further on in the article he continued, “Referring again to the SCA-Mölnlycke merger, the advantages gained by SCA in terms of integration and diversification should d also be mentioned.” (Browald, ibid)

In 1976/77 SCA acquired 44% of Bahco shares, complementing SCA’s operations in the engineering industry. The action was motivated by the same arguments as those justifying the Mölnlycke acquisition. “The acquisition of shares in Bahco AB can be seen in the same context as our merger with Mölnlycke. This is the way of expansion we have chosen as we can now see that our forest industry production is threatened by limitations of Swedish raw material supply.” (Rydin, 1977)2

In 1979, Mölnlycke accounted for 30% of total turnover in the group. In comparison, the share of the engineering division was 8% and of the traditional forest products 51%. In 1974, traditional forest products accounted for 76% of the total turnover (SCA, Annual Report 1974, 1979).3 In an interview in 1977, the CEO, Bo Rydin, answered a question about the future of the P&P industry in Sweden: “Well, yes, perhaps in the long-term perspective the phrase “crisis sector” could be used if we do not adapt and react to the new conditions resulting from the emergence of new cheap raw material supplies from South America and Africa. Initially, it is our production of market pulp which we may be forced to reduce… In my opinion, it is not certain that we will be able to compensate this reduction with our own production of different paper qualities. It may be difficult to find enough of these to process all of our present pulp production.” (Rydin, 1977)

2 3

The shares in Bahco were sold in 1980. Forest products include the production of corrugated board, newsprint, printing paper and pulp. This part of the company accounted for 76% in 1974 and 51% in 1979. In 1990, the share had increased to 54%.

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5.1 Discussion Since the middle of the 1950s, SCA focused on a strategy that aimed at integrating the large production of pulp with the large-scale production of paper. The first step was to invest in newsprint production (decision made in 1955). The second step was to invest in the production of corrugated d board (decision made at the end of the 1950s) and the third step to acquire converters, i.e. producers of corrugated cardboard, both in Sweden and internationally (commenced in the middle of the 1960s). Hence, the strategy of adding value to the production of pulp was implemented following its inception in the 1950s. However, the decision taken in 1973 to dispose of the hygiene product area was also logical, as that area was seen as part of an unknown sector dominated by consumer products. In 1973, prospects for traditional pulp and paper products were extremely good and management generally advocated a concentration in these traditional areas. The change in strategy just a few years later was initiated by the acute need of capital in Mölnlycke. However, the anticipated bottleneck in the future supply of wood, an important issue in 1974 and onwards, was also used to justify the decision. Thus, the issues in the debate during the middle of the 1970s were obviously of importance when the decision was made to acquire Mölnlycke. The acute shortage of wood and rapid shifts in profitability were obviously the principal reasons for the acquisition. The acquisition was also in accordance with options favoured at that time. The acute shortage of wood was taken very seriously and was the single most important driving force for strategic action at the time. A further motive was that diversification (mainly related diversification) in general was regarded as a popular development route in the 1960s and the 1970s. In this way SCA followed the general views regarding the future in the industry, which together with company-specific resources (a substantial cash reserve from the two profitable years in 1973 and 1974) and the sudden problems facing large customers offered an opportunity to initiate a strategic action. However, it must not be ignored that the actions taken were rather new to the industry. Thus the company took a new and important step forward in the ongoing integration process when it entered a consumer-oriented industry. That is, its action was consistent with the development towards further integration, even though it was implemented in an unorthodox manner previously rarely pursued in the P&P industry. 6 VIGNETTE 2 – MODO’S DECISION TO INVEST IN OFFICE PAPER One of the most crucial actions in MoDo’s history was the decision to build the first office-paper machine in Husum at the end of the 1960s. In the following this strategic action is further analysed. MoDo, with its history as a large family-owned producer off sawn timber and high-quality market pulp, decided in the early 1960s, to change strategy (Gårdlund, 1985). Following the old strategy, Domsjö and Husum became two of the largest pulp mills in Europe. At this time, the focus was on the improvement of quality in

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pulp and in the development of an organically based chemical industry. In 1964 Bengt Lyberg (CEO 1959-1971) stated that an important decision had been made for the future: “We will, therefore, in future concentrate on the production d of those paper qualities which are most advantageously produced within, or near to, end-user markets, bearing in mind that our ultimate goal is to extend our paper production into that of finished products.” (Lyberg, 1964, p. 3)

The background was, as Lyberg stated, that the link between the chemical and the forest industry had disappeared, as the raw material base for the chemical industry had changed (Lyberg, 1970). As prospects for the chemical industry were gloomy and a future shortage of wood had been predicted in the northern parts of the country, only increased refinement of forest products remained possible as a development line. In the 1960s, the first attempt to add value to the production of pulp was directed towards the tissue industry. The idea was to integrate the production of sulphite pulp at the Domsjö pulp mill with tissue products (Lyberg, 1970). The production of pulp at the Husum mill (approximately 465,000 tons in 1969) remained to be integrated. The decision to choose office paper for the integration at the Husum mill was not easy, even if the company had already formed an alliance with a producer outside Scandinavia in 1964. “When, following Mo & Domsjö’s extensive investigations and inquiries in this matter, the Board came to a decision, it could be seen as somewhat of a watershed.” (Lyberg, 1970, p. 2)

The decision to choose office paper was based on four factors. In an earlier attempt to integrate, the choice had been to produce office paper. The Hörnefors pulp mill, built in 1906, started production of office paper in the 1950s. The mill was, however, sold to the Forest Owners’ Association (Ncb) in 1961, but the experience and the know-how in producing and marketing office paper still remained in MoDo. The second factor was the 100% acquisition of Papeterie de Pont Saint Maxence (PPSM, France) in 1968. An alliance was created in 1964 but did not work out as expected. When the agreement ended in 1968 MoDo kept the PPSM mill as part of the deal. The third factor was the pulp grade produced at the Husum pulp mill. The combination of birch and pine was ideal for the production of office paper (Gårdlund, 1985, p. 99). Finally, the office-paper market was growing fast in the 1960s. In Sweden this growth was 6.5% annually. However, the decision was not so clear-cut in spite of these factors. Office paper was a minor product in Sweden. The total export in 1970 was about 100,000 tons. In comparison, the export of newsprint was more than seven times higher than the export of office paper that is, there was limited export know-how. Moreover, the production of office paper came mainly from small production units. In 1967, the average age of an office-paper machine in Sweden was 37 years, 10 of the 29 machines having been built prior to 1920. Their average production was 10,500 tons, compared to an estimated production off 70,000 tons on the planned machine at Husum.

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This ancient machine stock was partly a consequence of old regional localisation in the paper industry. Office paper was mainly produced in the south and, depending on the old customer structure, products were often customer specific. A further reason for the reluctance to invest in this product was the live-and-let-live-policy pursued in international trade negotiations. According to this policy, Swedish producers would mainly concentrate on bulk products, which could eventually result in advantages in the integration of pulp and paper production. Office paper, traditionally seen as a specialised customer product, along with difficulties in integration, was excluded from the Swedish product range. “In the manufacture of fine paper (i.e. office paper), a e.g. dry cellulose (chemical pulp) is mainly used as a raw material which means that even integrated mills have to take up and dry their own pulp before again disintegrating it for the production of paper.” (Landberg, 1957:11, p. 438)4

That the choice of office paper was difficult was confirmed in a short article in Svensk Papperstidning, (November, 1967). In the article, the plan for investment in a newsprint machine was described (at the Husum mill). This choice of product was still under consideration in 1968 even though contemporary opinion deemed it more of a future investment: “MoDo’s plans for a newsprint mill have been postponed for the time being. Profitability forecasts are not yet satisfactory.” (Carlgren, 1968)

However, forecasts predicted an emerging market for the standardised production of office paper. A4 sheets and computer paper were two of the grades mentioned. This standardised production was to be complemented by niche products made at the PPSM mill and later in Silverdalen.5 “We have now determined our way ahead and come to a decision about a new 70,000 ton fine paper mill integrated with our pulp mill. This can be seen as the result of a technical and marketing innovative approach, in which we divide production into bulk paper from Husum and a specialisation and refinement in the main areas of consumption.” (Lyberg, 1970, p. 1)

The commission of the office paper machine in Husum coincided with an extensive growth in demand in 1972-1974. This provided management with the time needed to create a marketing organisation and to attract customers. In 1973, when the company celebrated its centenary, the chemical operation was sold. The financial resources released were used for investment in a second office-paper machine and a 50,000 ton tissue machine in Belgium. As a result of the decision to invest, the pulp capacity increased by 100,000 tons in Husum. Both decisions were somewhat adventurous. “These units will be the largest of their kind in the trade. These investments, besides the necessary replacement investments, will incur considerable financial strain. Through a 4

5

This argument brings up a technical obstacle constraining integrative efforts. In interviews, this argument has been described as a myth – when the integrative process was once really tried out the technical obstacles were easy to overcome. The number of technical constraints and the “mythical” nature of these constraints have not been further researched in this project. It must be noted that, almost simultaneously, Nymölla, a company controlled by the Wallenberg sphere, invested in a similar project.

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higher average rate of profitability in the future and a reasonable improvement in credit over the present low level, it should nevertheless be possible to make the planned investments.” (MoDo Annual Report, 1974:1, Carlgren)

Both these machines were to be started in 1976-77, when the recession was over and a new growth period had been entered. In addition to this scenario, the decision to expand production was made during a period when the shortage of wood was acute, a fact that MoDo was aware of, but to some degree neglected. “In my opinion, the far too negative conclusions drawn from the forecast shortage of wood in Sweden have not only meant that all expansion plans within the forest industry have been postponed, but also imply that within a few years the forest industry must be prepared for a considerable reduction in overall output capacity.” (Carlgren, 1975, p 500)

Carlgren argued that measures such as increased import from Africa, South America and the Soviet Union – together with increased ditching, fertilization, chemical usage and a better utilisation of residues, were all expected to improve conditions. 6.1 Discussion The emphasis on large-scale production of market pulp combined with investments in chemical products followed general industry developments of the 1940s. A general shift occurred in the 1950s where the large-scale integrated production of pulp and paper products with its emphasis on bulk products such as newsprint, kraftliner and packaging paper dominated. Consequently MoDo’s decision to eventually abandon the first alternative (newsprint) in the 1960s can be interpreted as a reactive response. However, the eventual decision by Modo to integrate went beyond a late follower strategy. In its integration efforts MoDo’s choice was to focus on tissue and office paper. As illustrated in the vignette, the choice of newsprint would have been obvious for MoDo, had the established pattern in the industry been followed. The production of office paper is from both a technical and a marketing perspective better situated close to the customer. As illustrated in the vignette, this opinion grew into an official strategy pursued by the industry during trade negotiations with international counterparts. r The live-and-let-live policy in international trade was deeply rooted and maintained for decades. In 1983, when MoDo had two large office-paper machines and was planning for a third, warnings were still being given against any rapid expansion into the product groups traditionally belonging to West European producers. “We must adopt the policy of “Live and let live”. This does not mean that we must relinquish all our European markets for office paper. We can still allow these markets to grow, slowly and with circumspection. But we cannot expect the market to accept or absorb the production capacity of a new large-scale machine at once.” (Sundblad, 1983, p. 6)

MoDo’s choice, in many respects followed the beliefs of the time. The dominating production concept was followed since the focus was on large-scale, integrated production. The choice of product however, contradicted general opinion.

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The live-and-let-live policy was jeopardised when MoDo (and Nymölla at about the same time) started to produce and export one of the product grades traditionally produced close to end users. This step challenged the traditional division between bulk and consumer specialised products. 7 SCA AND MODO IN COMPARISON SCA and MoDo are two completely different companies. MoDo was founded more than a hundred years before SCA. MoDo was a family-owned and family-managed company. SCA’s “family” is the financial sphere established by Svenska Handelsbanken, i.e. it was a company run by professional managers from the beginning. Finally, the resources controlled represent a major difference. In 1945 MoDo was a company deprived of a self-sufficient f source of timber while SCA owned large tracts of wide forests. But SCA and MoDo were geographic neighbours. Both companies were also highly involved in pulp operations in 1945 and struggled for a long time to find ways of adding value to traditional pulp operations. The managements of both companies were active in trade associations, and contacts between the two companies were frequent. On the markett some “healthy” rivalry was obvious between the two companies. Notice that “market” here refers to the market for supplies (mainly timber and forests), labour, takeover prospects, etc., Cartels ruled until the 1970s on what is traditionally seen as the market. This rivalry can be characterised as one between big and little brother. In 1945 SCA’s turnover was 2.7 times higher than MoDo’s. In 1999, SCA’s turnover was 3.2 times higher than MoDo’s and, SCA was one step ahead of MoDo in strategic respects in the immediate post-war period. SCA decided to build newsprint machines in the middle of the 1950s, MoDo did not make its integration efforts in the paper sector until in the middle of the 1960s. We find another major difference between the two companies. MoDo was run by a family and the family made the decisions. Just to exemplify, four out of eight members of the board in 1960 were family members. This is significant information especially because Carl Kempe (employed in the company 1906, resigning as chairman in 1965) was a much admired leader of the company. He worked with Matts Carlgren (member of the board, CEO and/or chairman, 1952-1991) in the period 1952-1965 and most likely passed on his way of doing business to the next generation. “With his characteristic commitment based on an unusually deep insight he became intimately involved in decisions concerning corporate investments and he encouraged his team to take risks. Why should we be satisfied with a 50% increase in current production – why not 100%? It has been said about Carl Kempe that he was always lucky in his investments. This is perhaps nott always true, but makes you think of one of his own aphorisms “When luck keeps on coming, it’s not luck, it’s skill .” (Svensk Papperstidning, 1967:15, p. 485-486)

Matts Carlgren often repeated this belief in risk-taking. In 1985 he declared that MoDo had been willing to take financial risks many times in the past and would continue to do so in the future (Carlgren, 1985, p. 174). Carlgren’s risk-taking was

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probably one reason why the company remained independent until the 1980s, but ultimately a gambler will lose and consequently Carlgren lost control of the company in 1991. But the necessity to take risks in the 1970s and onwards was also to a high degree related to Carl Kempe’s ideas of how to develop the company in the 1950s. He was a firm believer in vertical integration, but contrary to the successful choice, he proposed integration into the chemical industry. This idea had existed for a long time, and one of the proponents was Torsten Hérnod, CEO of SCA (Hérnod, 1942:132). Still in 1958 the chairman of the board in SCA was open to this line of development, indicating that the choice between the two integration routes was not obvious at the time: “Yet another step forward in the same continuing process of development are the prospects opened by the manufacture of chemical products based on wood, which is however still in its infancy. Seen purely from the technical viewpoint these are of the greatest interest.” (Browaldh, 1958, p. 418)

The companies that pursued integration with the organical chemical industry were MoDo and Billerud (cf Lyberg, 1961; Skogens Skördar, 1962). In 1958, Billerud made a survey of existing and future applications for various pulp grades, which may serve as an example of the opportunities available at the time. In this survey Billerud identified a wide range of end products for which specialty pulp grades could be made. This range of end products included products such as undergarments made from rayon, viscose sponges (i.e. viscose pulp), plastic wall panels, household tissue, greaseproof sandwich paper, waxed paper for food wrapping, shelving paper, paper tablecloths, a variety of packaging papers, tire cord, coats, parasols, carrier bags, etc. The Billerud survey shows that by using technologically advanced pulp grades 37 different applications could be produced (Billerud, 1958). In 1953 SCA officially abandoned the idea of integrating into the chemical industry and instead started its second newsprint machine in 1958 and early on considered the start-up off a new business area: corrrugated cardboard. MoDo formally made the same decision in 1964. However, it took almost 20 years before MoDo was at the same point in its development as SCA in 1958, i.e. in 1976 MoDo started up its first office-paper machine in Husum. The conclusion is that the change from a focus on the chemical industry to paper products did not really occur until Carl Kempe resigned as chairman in 1965 and died in 1967. Only in 1972 did MoDo divest the chemical operations to finally leave that industry. But was not then SCA’s decision to acquire Mölnlycke a similarly adventurous action? The answer is obviously yes, but…The decision was to divest the hygiene operation, as it was not a part of the core operation. SCA was thereby following the strategic direction outlined 20 years earlier. SCA kept some shares in Mölnlycke, the acquirer of their hygiene operations, and Mölnlycke became a major customer to SCA as a result of the acquisition. When Mölnlycke just two years later was running into financial problems due to growth, SCA was making considerable profits. In this context, the take-over of Mölnlycke can be seen as a not so adventurous financial investment.

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The smart thing was to keep Mölnlycke as a highly independent business unit for a very long time (about 15 years). This decision made it possible to divest the operations if needed, but more importantly it guaranteed autonomy from the forest operations that might otherwise have interfered with the culture of a highly consumer-oriented operation! 8 SCA, MODO AND THE SWEDISH PULP AND PAPER INDUSTRY In the post-war period the Swedish pulp industry started to integrate forward and in the 1970s we can finally talk about one industry, the pulp and paper industry. Tables 6.9 and 6.10 show this change in production on an industry level. Table 6.9.

Production and export of pulp in 1950 and 1994.

Product Semi-chemical pulp Sulphite pulp6 Sulphate pulp Mechanical pulp Total pulp

Production Export share 1950 (million of production tons) (%) ----1.4 79 1 65 0.7 39 3.1 67

Production Export share 1994 (million of production tons) (%) 0.3 0 0.7 36 6.2 38 2.9 9 10.1 29

(SCPF, Market Survey, 1969; Skogsindustrierna Annual Report, 1995)

Table 6.10. Production and export of paper in 1950 and 1994. Product

Wrapping paper (in 1950 called kraftpaper) Board (in 1950 included in cardboard) Corrugated cardboard (including fluting and liner) Printing paper (excluding newsprint) Newsprint Miscellaneous Total

Production Export share 1950 (million of production tons) (%) 0.3 74

Production 1994 (million tons) 1.0

Export share of production (%) 86

----

---

1.5

83

0.2

62

1.9

84

0.13

37

2.1

82

0.3 0.25 1.2

63 62 63

2.4 0.4 9.3

84 75 83

(SCPF, Market Survey, 1969; Skogsindustrierna Annual Report, 1995)

One of the companies that tookk the lead in this change was SCA. It made early and major decisions to integrate the production of pulp and paper. From the analysis 6

Including the production of dissolving pulp.

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above it is clear that as SCA and to some extent Stora Kopparberg (today StoraEnso) started their integration process they also occupied the most obvious product niches. For the latecomer, in this case MoDo, the only way to catch up was to be more innovative. The choice was a more unexpected product (office paper) and ways to expand faster than their finances allowed (innovative financing of new machines). As showed above, the risk-taking connected with such actions was in line with the personality of the management as well as the family culture (it is hard to say if it also was a part of the company culture; some signs indicate that is was not). Relating these empirical conclusions to Lamberg’s (in this volume) concept of “strategic path” it is possible to categorise factors driving the two companies. Obviously competitive environmentt including a factor such as technological development is of utmost importance to understand SCA’s and especially MoDo’s strategic formation. Chemical products based on oil became increasingly competitive, forcing chemical products based on pulp processes out of the market. Furthermore the economic gains made available by technological development forced most actors to initiate integration projects. Competitive vigor was therefore of crucial importance to understand the possible strategic options available to the actors in the 1950s and 1960s. Further institutional environment, described more in detail in Melander (1997) was putting pressure on actors. Group pressure, first to go for chemicals and later for paper and especially newsprint, was hard on the two companies. Turning to the intra-organisational environmentt it is argued above that MoDo’s behavior can only be understood when the strong family culture is taken into account. It was this culture that made the company withstand institutional pressures for paper-related integration and it was this culture that made it act fast and innovatively when eventually changing course. In the case of SCA and Mölnlycke it is obvious that the strategic actions undertaken were at least partly directed by a financial focus of professional management. The acquisition of Mölnlycke was seen as a safe investment. Either it turned out to be a financial investment bringing good returns or it could develop into an interesting diversification action. Either way the acquisition was not in conflict with either industry-wide institutional or competitive constraints, as it was not seen as a change of strategy at the time. Finally, considering the two companies over a longer time horizon it is striking to observe that there are so few major strategic changes taking place. As illustrated in Melander (1997) the strategic issues at the industry level remain the same for long periods and often the solutions to an issue often live longer than the issue itself. The interesting question is whether this is specific for the two companies here discussed and/or industry specific. Or whether it is specific at all!

CHAPTER 7

TWO FAMILY FIRMS IN COMPARISON: AHLSTRÖM AND SCHAUMAN DURING THE 20TH CENTURY

JARI OJALA University of Jyväskylä e-mail: [email protected]

KALLE PAJUNEN Tampere University of Technology e-mail: [email protected]

1 INTRODUCTION Ahlström and Schauman are among the most prominent companies in Finnish industrial history, being family firms engaged in different branches of economic activity. At first both were mechanical wood processing companies, but diversified later into the pulp and paper industry as well. Ahlström is even still today an important paper producer, whilst Schauman merged in 1987 with the Kymmene Corporation, and is nowadays a part of the UPM-Kymmene Corporation. This paper analyses the strategic decision processes undertaken in the named companies during the 20thh century. The companies were not the most typical ones in the Finnish wood processing industry, but were, perhaps, typical examples of old family firms facing the challenges of the modern industrial world. These two companies are not alike, which makes the comparison difficult—but also challenging. Ahlström and Schauman fulfil the basic definitions of family firms. A company is sometimes defined as a family firm: a) when it is owned (or at least a major part of it is) by one family, and b) it has gone through generational change—or such a change is likely (Casson, 1982; Koiranen, 1998; Laukkanen, 1994; Pollard, 1965; Rose, 1993). Both of the case companies were, or at least the major parts of them were, owned by one family and went through several generational changes from the 167 Juha-Antti Lamberg, Juha Näsi, Jari Ojala, and Pasi Sajasalo (eds.), The Evolution of Competitive Strategies in Global Forestry t Industries: Comparative Perspectives, 167–189. © 2006 Springer. Printed in the Netherlands.

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late 19th century onwards. Usually, the interaction between family and company is seen as a modifier for the family firm. This is fairly evident in the case of Ahlström and Schauman. Casson (1999) defines a family firm as a firm, which is both owned and controlled by a family. Though both the case companies had professional managers several times during the 20th century, the family owners always took an active part in the decision making process on the board of the companies. Thus, both companies also fit Casson’s definition. In fact the definition of a “family firm” does not fit too well with the case companies, as the number of owners was relatively high during the latter part of the 20th century due simply to the growth of the families: ownership went far beyond the limits of the “core family.” They were also quite removed from being the ideal entrepreneurial enterprise, which is a basic form of the family firm. Therefore, one should perhaps use the term family or even kin owned d enterprise. In the case of Ahlström the number of family members involved in owning the company was in 2001 206 (79% share of stocks and 98% share of votes), the total number of stockowners being 232 (including 231 private persons, and an institutional investor, namely, an insurance company). Ahlström was for a long time a closed company to outsiders; even in financial crises family members refused to take aboard outsiders as company shareholders. In the 1940s, though, one fifth of the stocks were issued to outsiders due to the financial crises during the wartime. For a long time Ahlström belonged to the so-called “SYP-sphere”, namely, the Union Bank of Finland (SYP) controlled directly or indirectly through other companies circa 1/6 share of Ahlström stocks. However, the bank was not in the case of Ahlström an “active owner”, it was not involved in managing the firm, like it did in many other cases. (Kunnas, 1978; Näsi, Ranta, & Sajasalo, 1998; Schybergson, 1992) In Schauman the share of the family members in ownership diminished step by step throughout the century. In 1961 family members owned directly, or through other companies owned by the family, 74 per cent of the company and in 1979 they still owned 58 per cent (Schybergson, 1983a). The point of departure in this paper is the start of the 20th century, though earlier periods within the companies’ histories are also taken into account in the analysis of strategic actions. More precisely, in the case of Ahlström the year 1908 is appropriate because it was then that the firm started as a joint stock company owned by the family members—the founder of the company passed away a decade earlier. For Schauman, a similar approach is used: the starting point is 1911, the year when the founder of the company passed away and it was registered as a company owned by the family. Thus, the formal beginning of the family firm, that is, the second generation ownership is the starting point of this paper. (Schybergson, 1983a, 1992) However, for practical reasons the focus of this paper is on the post-war period from which more accurate data is available. The paper aims to find out whether there are any “typical” family firm “paths” in the development of the case companies. As typical family firm phenomena we will stress the dynamic and entrepreneurial attitude, continuation, reasonable profit making, low encumbrance rate, and financial difficulties. Nicholas (1999) argues that the inherited business creates complacency and conservatism and delays the adaptation of efficient administration and organisational structures. The same

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difficulties are also stressed by Chandler (1977; 1990). Family firms are usually seen as a primary obstacle in economic growth. Thus, the “negative” aspects of family firms have usually been stressed in recent studies. These aspects could be caused by or be outcomes of the two weaknesses in family firm structure in the long run: entrepreneurial decline on the one hand, and managerial failure on the other. Entrepreneurial decline is understood here as the diminishing interest of the owners, namely family members, with regards to the company’s affairs. This is due to the “buddenbrook syndrome”: heritors are no longer interested in entrepreneurial activities and the dynamics of the family firm fade away. As Veranen (1996) has pointed out this could lead to “family firm syndrome”, namely, professional managers obtain a prominent position in the company (Veranen, 1996, p. 125–126). Managerial failure is partly contradictory, partly overlapping with the aforementioned definition. Basically, managers are chosen from family or kin members, and are avoided. This could, according to Chandler (1977) and others, cause diminished growth of the company. Managerial failure can lead to failure in the transformation of the company—if such a transformation is necessary for the company’s development. Thus, we will argue that there are some “typical” family firm phenomena in the case companies’ development, though some authors (Casson, 1999) argue that there is no need for a special theory concerning family firms. On the whole, we will argue that family firm structure is not necessarily the only negative constraint for a company’s development, as is illustrated in the case of Ahlström. There are many contradictory pressures affecting family owned enterprises in the long run. For example, the needs of the family and company are overlapping. Thus, the owners of the family firm are usually interested in the firm and the ownership structure remains stable over a long time period, whereas in listed companies ownership structure can change, at least in part, on a daily basis. The continuation of the firm is essential for the family members, but the willingness to make further investments and become more in debt is usually fairly low. This can, obviously, cause problems for the further growth and, therefore, for the continuation of the firm. The owners of the family firm are interested in obtaining a decent return from the company. In time interest in the business may fade, and the firm is sold. This paper aims to discover whether family firm structure can be seen in the evolution of the two case companies and in their strategy processes. The large-scale wood processing industry, especially pulp and paper production, is not an easy endeavour for family firms to be involved in. Pulp and paper production is a mature industry, with huge capital costs in terms of production facilities. Thus, growth requires sizeable investments. In the case of the family firms growth is funded via their own capital and by loans. Therefore, involvement in this mature industry is highly risky for the family firms due to debts from loans. This paper tries also to analyse why and how, or if, Ahlström and Schauman managed to emerge in such an industrial sector. The paper is divided into five parts. First, there is this introduction. Next the second part gives a short description of the companies and their environment. The third part analyses the evolution of the companies via the comparative perspective using economic figures and variables (Lamberg, 2001a, 2001b; Lamberg & Ojala,

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2001; Lamberg and Ojala, in this volume; Ojala, 2001a, 2001b). This is followed by the fourth part which aims to analyse the strategic process of the family firms by using action categorization as a methodological tool. In the concluding section the main argument is summarised and theoretical considerations are given. 2 CASE COMPANIES WITHIN THEIR INSTITUTIONAL AND COMPETITIVE ENVIRONMENT Ahlström, founded in 1851, was for a long time one of the largest industrial corporations in Finland. Although the company has diversified into several sectors, it has mainly operated within the wood-processing cluster. Ahlström’s first paper mill was founded in 1907 (Kauttua) and their first pulp mill in 1917 (Varkaus). Especially since the 1950s the engineering works received more importance in the company, which had started to produce, among other things, machinery for the pulp and paper plants. In chemical wood processing Ahlström concentrated on paper manufacturing. During the 1970s the company invested heavily in wood processing in Varkaus, including highly integrated pulp and paper production—the most modern and efficient in Finland. One of the most important decisions in Finnish industrial history was made in 1987, when Ahlström unexpectedly sold this “dream combine”, and concentrated on the production of niche paper grades with a high degree of processing and machinery for the pulp and paper industries. The current owners are today the 4thh—6th generation after Antti Ahlström (1827—1896) founded the company. (Ahlström, 1998; Koiranen, 1998; Schybergson, 1992) Today, Ahlström is one of the most global Finnish companies with paper production in Asia, Europe, and North America. The company is the world market leader in some special paper products. Oy Wilh. Schauman Ab, founded in 1883, concentrated on saw milling and plywood production during the early 20thh century. It became involved in the pulp industry in the 1930s and in paper production in the 1960s. Officially Schauman did not enter the chemical wood processing industry until 1960, when a paper and pulp producing company owned by the same family was merged with the mechanical wood-processing firm. Paper production played, however, only a minor role in the company’s activities. Saw mills, plywood and other mechanical wood processing products constituted still in the early 1960s about 70 per cent of the company’s turnover, but by the late 1970s the share of these products had declined to 40 per cent. (Schybergson, 1983a, 1983b) Schauman concentrated on the intermediate bulk products, most of all to market pulp, whilst Ahlström specialised in the paper grades with a high degree of processing (fine and special papers). In 1987 Schauman was merged with the Kymmene Corporation. Schauman was among the most essential (market) pulp producers in Finland. For example, in 1985 the pulp production capacity of Schauman was the third largest in Finland composing circa ten per cent of the total (Annual Report of Finncell 1985). In the “best year” 1979 Schauman was the largest single market pulp producer in Finland with a 16 per cent market share (Schybergson, 1983a). Ahlström was among the leading paper producers in Finland; in 1985 it was the third largest producer of

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newsprint. Ahlström produced in this year circa seven per cent and Schauman about two per cent of the total Finnish paper production. (Annual Report of Finnpap 1985) Ahlström and Schauman were both involved in the export markets, though their products were also sold within the domestic markets to a much larger extent than many other Finnish wood processing companies. In the case of Ahlström, for example, in the late 1970s circa 50 per cent of the production was exported. The mechanical engineering industry of Ahlström produced machinery especially for the domestic pulp and paper companies. (Valjus, 1987) Schauman produced pulp mainly for export. However, during the 1970s domestic markets gained a more profound position due to some institutional changes related to cooperation between the producers and buyers of the pulp (Schybergson, 1983a). The competitive forces affecting the performance of both Ahlström and Schauman were, however, mainly international. Domestic competition between the Finnish wood processing companies was basically concentrated on raw material acquisition. The competition within the international markets, in demand side, was tight. The wood processing industry, especially the paper and pulp production sectors, is highly competitive. The volatility in the demand and supply balance and inventory speculation by customers makes the forest industry cyclical by nature. Therefore, there is a strong correlation between international business cycles and the economic performance of wood processing companies. For the whole of the 20th century Finnish producers competed on the international markets, mainly with high volumes and several competitors, with bulk products. In this type of situation the buyer could easily change supplier. The sales price was defined on the world markets; thus, competitive advantage in terms of sales price was difficult to achieve. (Diesen, 1998; Porter, 1980; Rantala, 1988) Better returns were only achieved by constructing more efficient production machinery: larger and faster machines and industrial units, as well as huge, integrated production facilities such as Varkaus owned by Ahlström. Consequently, the value of investments grew, and in many cases companies ran into financial difficulties. The competitive advantages on the supply side for Finnish firms during the 20th century including the case companies—were related to factors of production: relatively cheap raw material (including energy), low wage levels, and low capital costs. The situation, however, changed by the end of the century. It might be argued that on the supply side the competitive advantage of Finnish firms since the 1970s has been technological know-how. The low cost strategy led to massive investments in production technology in order to improve the operational effectiveness. f In fact, the production machinery of Finnish producers was during the 1990s much more modern compared to that of its competitors. This enabled the concentration on products which required a high degree of processing, but also caused excessive indebtedness and relatively low capital turnover. (Pohjola, 1996) This can be clearly seen in the case of Schauman, which will be described later in this paper. Both of the case companies were engaged in bulk product production up until the end of the 1980s. Schauman is a typical example of a pulp producer. In chemical wood processing Ahlström produced both paper grades which have a relatively low degree of processing (newsprint, board), as well as high quality special papers (coated paper from the 1950s on, fine papers, and so on). Ahlström concentrated

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from the late 1980s on niche products, such as special papers (Annual Report of Ahlström 1987; Schybergson, 1992); This was a major strategic withdraw from the “common” Finnish way: practically all the Finnish companies followed up until the late 1980s the low cost strategy in terms of production efficiency. Instead, Ahlström introduced a product differentiation strategy. According to Artto (1995a) the product differentiation strategy has provided in the long run better competitive advantages and profitability in the pulp and paper companies than the focus on the low cost strategy did. Finland offered a favourable formal institutional setting for the wood processing industry, due to the essential position of the forest cluster in the Finnish economy (Ojala and Lamberg, in this volume; Pekkarinen & Vartiainen, 1993) The special institutional constraints affecting family firms were mostly related to taxation. The transformation from the family firms to listed companies was in many cases—also in the case of Ahlström—delayed due to taxation: stocks of the listed companies were taxied harder than the shares of the family firms (Kunnas, 1978). Both companies were involved in the activities of the sales associations, namely, the export cartels of the Finnish forest industries (Heikkinen, 2000; Laiho, 1998; Malm, 1928). Ahlström was a founding member of Finncell, Finnpap, and in the reorganised Finnboard at the end of the 1910s. Ahlström remained an active member in these associations up until the turn of the 1980s and 1990s, when it retreated from producing pulp and several paper grades, including board (Korpivaara, 1988). Schauman was also a member of these associations from the formal beginning of its pulp and paper production up until the merger in 1987 (Schybergson, 1983a). Heikkinen (2000) argues that the sales associations were particularly important to the small or medium sized companies, and mostly to family firms, who did not have the possibility to establish their own sales organisation abroad. 2.1 Evolution of the two family firms Ahlström and Schauman had evident similarities during the 20th century, but they were still different kinds of firm. Ahlström was a conglomerate with activities within various industrial sectors, while Schauman concentrated mainly on sawmills, and plywood and pulp production. Diversification was the main strategy in the case of Ahlström, to be precise, related diversification f within the forest cluster. This means that the company diversified, for example, into the metal industry to produce production machinery for the wood processing industry. This diversification had deep roots in the company’s history: from m the late 19th century, when the first ironworks were bought by the company. Ironworks constituted at best circa 50 per cent of Ahlström’s sales during the 1870s, but the share diminished to 10 per cent by the end of the 19th century. (Schybergson, 1992) Engineering division provided circa a fifth of the company’s sales up until 1987; after the branch rationalisation the importance of the engineering division grew so that it provided over half of the sales. Ahlström has concentrated especially on producing production machinery for the pulp industries. (Korpivaara, 1999; Niemi, 1979) In the case of Ahlström the diversified structure served well when compared to many other wood processing companies in Finland during the 20th century. Therefore, it is not surprising that

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Ahlström is even today a diversified company. Ahlström also engaged in unrelated diversification: for example in glass and plastic industries. Undiversified branches, however, were never as significant for the company’s performance as the related branches within the wood-processing cluster (pulp, paper, and metal engineering). (Kunnas, 1978) Schauman was also involved in related diversification: the company produced mainly pulp, timber, plywood, and paper. Unrelated activities were not involved, f company producing luxury yachts. with the exception of Nautor, an affiliated Schauman also engaged in the metal industries for a short time during the 1960s and 1970s, when it bought a company producing pipes for industrial plants. The acquisition was implemented in order to secure the building of a new pulp and paper plant. (Schybergson, 1983a) 100000 10000 1000

00

95

20

90

19

85

19

80

19

75

Ahlström

19

70

19

19

65

60

19

55

Schauman

19

19

50

45

19

40

19

35

19

19

19

30

100

Four firm average

Sources: Annual Reports of Ahlström and Schauman; Lamberg & Ojala, 2001. Note: Four firms: Kymmene, UPM(-Kymmene), (Stora-)Enso, and Metsäliitto (M-Real).

Figure 7.1. Net Sales of Ahlström and Schauman, 1930—2003 (million U.S.-dollars, def. to 2003 values, log.).

As Huolman (1992, 1995) and others have noted concerning a number of wood processing companies in Finland and in Sweden, the companies first usually engaged in related diversification and only after a period of time in unrelated ones. (Lamberg & Ojala, 2001; Lilja, Räsänen, & Tainio, 1991a; Porter, 1980) In the case of Ahlström and Schauman the diversification was mainly—at least in the beginning—aimed to back up the wood processing industry. Furthermore, in both companies wood processing remained as the main activity for the whole of the 20th century. Mechanical wood processing, however, lost its status in both companies. For example, in Schauman mechanical wood processing constituted circa 70 per cent of the sales during the early 1960s, but the share dropped to 40 per cent by the end of the 1970s. In Ahlström also the metal and other industries (especially the glass industries) constituted together, at best, aabout half of the company’s sales. In 1900

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the (mechanical) word-processing still constituted 90 per cent of Ahlström’s sales. During the 1920s and 1930s chemical and mechanical wood processing produced together about 80 per cent of the sales—pulp and paper mills and converting plants produced already in the 1920s and 1930s circa 60 per cent of the company’s net sales. From the 1940s up to the 1980s the wood-processing sector constituted about 40—60 per cent and today about 51 per cent of the company’s sales. (Schybergson, 1983a, 1992) Thus, in the long run the wood processing was loosing its status in the case of Ahlström. Not only was the line of business different between the case companies, they were also different in size. The net sales of Ahlström was roughly double (or almost fourfold during the 1950s) compared to that of Schauman (Figure 7.1). Ahlström was among the largest Finnish industrial t enterprises throughout the 20th century, though it lost its position during the 1980s and 1990s—for example, during the early 1930s Ahlström was the largest industrial enterprise in Finland (Schybergson, 1992, p. 123). In 2000 Ahlström was ranked number 24 (1999, no. 20). Schauman was clearly a smaller firm, but it was also ranked among the top-20 in the list of Finland’s largest enterprises from the 1920s onwards (Hjerppe, 1979). Schauman grew in size especially during the 1960s. That was due to the changes in the family firm structure: the pulp plant owned by the family was connected formally to the Schauman in 1960. The fact that Ahlström grew almost at the average level of the listed companies, and Schauman even faster, clearly shows that family firm structure was not in the case of Ahlström and Schauman an obstacle for growth. Especially during the 1960s and the 1970s both companies grew on average faster than the listed companies (in Figure 7.1 Kymmene, Enso, UPM, and Metsäliitto). The average annual sales of Ahlström were during the 1990s almost eightfold compared to the 1940s and 1950s. Schauman grew somewhat faster: the sales during the 1980s were about nine fold compared d to the first period. Compared to the average growth of the control group of four major producers (Kymmene, Enso, UPM, and Metsäliitto), the growth of the case companies was slower: the average annual sales of the four listed companies was almost 18 times larger in 1990s compared to the 1940s and 1950s. However, the faster annual growth of the control group is only dated to 1990s and acquired mainly through mergers. From the 1940s up until the 1980s the growth of Ahlström was a bit lower than within the control group companies, but Schauman grew much faster during the 1950s and 1960s, at the average level during the 1970s, and below the average level during the 1980s. The average sales of Ahlström were 1.7 times larger during the 1960s compared to the previous decade—approximately the same level of growth continued even over the next three decades. Schauman grew much faster: its sales were on average 3.3 times larger during the 1960s compared to the 1950s, but the growth dropped to 1.8 in the 1970s, and finally to 1.5 during the 1980s. Due to continuous growth, circa 41 per cent of the combined turnover after the Second World War was produced in the case of Ahlström during the 1990s, while Schauman produced 40 per cent of its turnover during the 1980s, which was the last independent decade in the company’s history.

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The steady growth of the case family firms required investments in the production capacity. In both cases the growth was acquired mainly through organic growth, although Ahlström made several acquisitions. Thus, the cautious investment policy, which is sometimes said to be typical for family firms (Casson, 1999, p. 11), is not the case in Ahlström and Schauman. (Figure 7.2) Ahlström was, for example, in 1977 the largest private industrial investor in Finland (Kunnas, 1978)—only a couple of state owned enterprises investedd even more than Ahlström. The growth rate of Ahlström’s investments slowed down from the 1960s on. The average annual investments in the case of Ahlström were during the 1960s 2.4 times larger compared to the previous decades and in the 1970s 2.2 times, the 1980’s 1.6 times, and finally the 1990s 1.2 times larger compared to the previous decade. Ahlström’s investments from the sales in 1944—1999 were circa 11 per cent, Schauman’s 14 per cent (1944—1987), and in four listed companies 13 per cent (Figure 7.3). Thus, the investments of Ahlström were below the average, whereas Schauman invested above the average compared to the control group firms. Schauman aimed towards expansion during the 1960s and 1970s. This can be clearly detected from the investments of the companies depicted by Figure 7.2. Both companies invested heavily during u the 1970s: the investments even rose above the four firm averages composed in Figure 7.2. The investments of Schauman surpassed Ahlström during several years in the 1970s. This was due to the ongoing building of a new pulp plant. The share of investments also rose enormously in the case of Schauman in those years, up to almost 60 per cent of the sales in 1976 (Figure 7.3). Schauman is, thus, a good example of a relatively small company engaged in the pulp industry with high capital costs. It might be argued that such an investment was impossible for a listed company of the same size to make—it succeeded in the case of Schauman due to its family ownership structure; the owners were willing to take a major strategic step. The investments of Schauman followed the “sprint and pauses” (Mintzberg & Waters, 1982) strategy. However, there was only a few of these “sprints.” After the intensive investments, the company faced more stable years without any major investments, as it was the case also in number of other Finnish wood processing firms (Ruuhela, 1972). In the Ahlström case the investment policy was far more modest. Investments exceeded 25 per cent of the sales only in 1977, when the company made several production investments. If Schauman is an example of an “entrepreneurial”, risk taking family firm, Ahlström is an example of a family firm, which favoured steady growth without any sudden and big changes. Of course, the size of the company enabled Ahlström to make even large investments without them affecting overall performance. Ahlström invested, in particular, in the integrated wood processing facilities in Varkaus from the late 1960s up until the early 1980s. Clearly, already by the start the costs rose over the original budget. (Paperi ja Puu, 1981; Schybergson, 1992).

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Sources: Annual Reports of Ahlström and Schauman; Lamberg & Ojala, 2001. Note: Four firms: Kymmene, UPM, Enso, and Metsäliitto.

Figure 7.2. Investments in the case companies 1960—2003 (million U.S.-dollars, def. 2003 values). 70 60 50 40 30 20 10

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Sources: Annual Reports of Ahlström and Schauman; Lamberg & Ojala, 2001. Note: Four firms: Kymmene, Enso, UPM, and Metsäliitto.

Figure 7.3. Investments from sales, Ahlström and Schauman, 1960—2003 (per cent share).

High investment rates caused financial difficulties in both companies. The family firms cannot collect funding for the investments from the markets. Thus, the organic growth has to be funded through cash flow financing or with loans. In Alström and

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Schauman, internal financing was not enough to cover all the costs. Both companies fell into debt. Ahlström, for example, funded investments during the 1960s with debts and the share of the short-term liabilities rose on the company’s balance sheet. The inflation caused by the devaluations of the Finnish mark partly helped the indebted companies. (Annual Reports of Ahlström 1966 and 1967) In spite of this fact, especially Ahlström was cautious in avoiding investments with loans. This can be detected from the fact that in 1979 about 88 per cent of the investments were funded by their own capital, and in 1980 the share was over 50 per cent. (Rantanen, 1981) The high indebtedness rate also conflicts with the family firm structure of the case companies. It is usually argued that family firms try to avoid this kind of situation. Both companies were, however, engaged in a mature industry where high investments were necessary, and for the family firms the investments were only possible through loans. Therefore, it is not surprising that both companies had in the post-war period more liabilities than assets and that the share of the liabilities even exceeded the average level of the two listed companies (UPM and Kymmene, Figure 7.4). However, the share of the liabilities on the balance sheet is a rough pointer of the indebtedness of the company due to the under valuation of the won capital. This is the case especially in the large wood processing companies with expensive production facilities and large forest areas. Therefore, a more accurate determinant is the share of the debts from the turnover. According to this method of calculation Schauman was more incurred into debt due to the investments (Figure 7.5). The share of the debts from turnover almost exceeded 200 per cent in the case of Schauman in 1976. Schauman was indebted already during the early 1960s when a new paper plant was built, but especially during the 1970s due to the new pulp plant. The investments during the 1960s were at least partly covered by their own capital, but the large-scale pulp investment was funded only by loans. The costs of the pulp plant also exceeded the original budged by one third. (Schybergson, 1983a) Ahlström also incurred a debt during the 1970s due to the large investments and acquisitions. In the case of Ahlström the sum of credit capital exceeded the turnover during almost the whole 1980s—in the case of Schauman the liabilities went far over the turnover from 1975 up until the merger in 1987. Thus, the high indebtedness rate, which was closely related to the family ownership structure, caused Schauman’s collapse. In the case of Ahlström the share of credit capital from the turnover was much lower, even when compared to the listed companies. As a result, it might be argued that the more modest growth strategy, which was also related to the family ownership structure saved Ahlström in the long run.

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Sources: Annual Reports of Ahlström and Schauman; Ojala, 2001a&b. Note: Two firms: Kymmene and UPM.

Figure 7.4. Share of the liabilities in the case companies’ balance sheet (per cent share), 1930—2003.

The over one hundred per cent share of the credit capital from the turnover was not peculiar in the 1980s Finnish wood processing industry (Ojala, 2001a, 2001b). Artto (1995a) and Pohjola (1996) have also noted the indebtedness of the Finnish wood processing companies during the 1980s. According to Artto the share of liabilities from the capital structure in Finnish wood processing companies was 83 per cent during the years 1982—1992. The figure was much lower among international competitors: in Canada it was 60 per cent, USA 39 per cent, and in Sweden 62 per cent. In Ahlström the figure was below the Finnish average (79% in 1980—1989), but in Schauman was above the average (86% in 1980—1989). Artto has even stressed that the investment in pulp production is the main reason for the indebtedness in the Finnish wood processing industry—just like it was in the case of Schauman (Artto, 1995a; Artto & Juurmaa, 1999; Pohjola, 1996). Pohjola and Artto have argued that within the Finnish wood processing industry the capital effectiveness is on a relative low level because of the high investment rates, and thus, the proportionally large share of debts in the balance sheet. Companies also have a lot of equity capital in terms of landed property and expensive production machinery. (Artto, 1985, 1995a; Artto & Juurmaa, 1999; Pohjola, 1996) In the case of Schauman the capital turnover was slow, in particular during the turn of the 1970s and 1980s (Figure 7.6)—in the period when the company was excessively indebted due to the investments in the mid-1970s. In the case of both companies the capital turnover slowed down from the mid-1950s up to the late 1980s. However, the turnover was not as slow as in many other Finnish wood processing companies at the same time, but the 20 months capital turnover of Ahlström from 1988 was clearly unsatisfactory. Ahlström managed to go through a

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vigorous structural alteration during the 1990s, which can be seen especially in the more effective capital turnover. It managed to push the turnover below one year in 1995, which can be regarded as a fine result for a company of its size engaged in the wood processing industry. One reason for the better capital turnover is the large scale selling of the landed property. Ahlström sold 100 000 hectares of woodland to Enso in 1992 (Annual Report of Ahlström 1992). The niche products with a high degree of processing offered Ahlström a much faster capital turnover than the wood processing companies on average. The CEO of Ahlström, Pekka Rantala, argued in 1988 that the capital turnover of these niche products was two times quicker than with traditional products produced in the Varkaus combine that was sold a year before. Also the share of R&D from the turnover was much higher in the case of Ahlström compared to the other wood processing companies. In fact, it exceeded already in 1988 two per cent, while in the other companies the share was below one per cent (Korpivaara, 1988). 250 200 150 100

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Sources: Annual Reports of Ahlström and Schauman; Ojala 2001a&b. Note: Two firms: Kymmene and UPM.

Figure 7.5. Incurring of a debt in the case companies: the share of credit capital from the turnover 1930—2003 (per cent share).

The capital turnover or indebtedness tells us only indirectly the profitability of the companies. Therefore, the rate of return (ROI) is also estimated. Unfortunately, we have accurate data only from the early 1970s on. From today’s perspective the rate of return of both companies were on a fairly low level throughout the 1970s and 1980s (Figure 7.7). It is often argued that the family firms tend to be unprofitable. The low level of the return on investmentt in the case companies seems to back up this argument. However, on many occasions both companies offered a decent return on the capital invested. Furthermore, the relatively low rate of return might also be caused by the differences in bookkeeping: family owned companies were not as tightly controlled by the authorities as the listed companies were. Thus, especially

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Ahlström was accused several times by the leading business magazine in Finland in the 1970s and 1980s of providing much lower profitability figures than were actually true. The company could, for example, cut the profits by increasing depreciation or by under valuating its holdings especially in the forestland (Kunnas, 1978, 1980). Schybergson (1992) has calculated that the “official” profits on balance sheets were from the 1950s up to the 1980s only about one third of the “real earnings”. Therefore, also the rate of return was far better than the official figures showed. 30 25 20 15 10 5

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Sources: Annual Reports of Ahlström and Schauman; Lamberg & Ojala, 2001. Note: Four firms: Kymmene, Enso, UPM, and Metsäliitto.

Figure 7.6. Capital turnover in the case companies in months (total t assets/sales*12).

In the case of Schauman, involvement in pulp production, which is especially exposed to economic fluctuations (Lamberg & Ojala, 2001), can be easily detected: the rate of return varied sharply between different years. In the Ahlström case, the rate of return was more flat, though fairly low. On average, Schauman produced a bit better turnover of investment of capital than Ahlström. Compared to other Finnish companies, however, both Schauman and Ahlström produced a lower return on investment, which can be caused, as noted above, by the differences in bookkeeping. The productivity growth in the case companies was enormous - as was the case in other Finnish wood processing companies in the time period as well (Figure 7.8). The turnover produced by a worker was in Ahlström 6.4 times larger during the 1990s than it had been during the late 1940s and 1950s. In Schauman the turnover produced by one worker was during the 1980s circa three times larger than it was a couple of decades earlier. The productivity in both case companies, as well as in the four compared listed companies, was at the same level. This refers to the fact that there were no significant differences in n the production technology. In fact, the production technology was usually purchased from the same (Finnish) suppliers.

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Thus, the information related to production was relatively free. Only during the 1990s was the productivity of the four listed companies much higher than in Ahlström. The listed companies were engaged in the mass production of the bulk products where the high productivity rate was the key element for the low price strategy. Ahlström however, as noted several times before, achieved a whole different kind of strategy. 20.0 15.0 10.0 5.0 0.0 -5.0

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Sources: Annual Reports of Ahlström and Schauman; Ojala 2001a&b. Note: Two firms: Kymmene and UPM.

Figure 7.7. Return on investment (ROI) in case companies (%).

0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05

Schauman

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Sources: Annual Reports of Ahlström and Schauman; Lamberg & Ojala, 2001. Note: Two firms: Enso and UPM.

Figure 7.8. Productivity in the case companies: turnover per worker 1948—2003 (million U.S. dollars, def. 2003 values).

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The quantitative analysis and comparisons between Ahlström and Schauman clearly show the processes and contrasts of these companies. Schauman made extensive in actions, but the company was too small. Huge investments in the new production capacity harmed the balance sheet and the company fell into debt, but on the other hand, the best years had provided a decent return on the invested capital. Indeed, during the 1970s and 1980s Schauman was considered to be the most profitable wood processing company in Finland (Schybergson, 1983a). The possibilities for organic growth were, however, limited. The price of the new production capacity grew all the time, far over the capabilities of the medium sized family firm such as Schauman. Thus, the only possible way for further growth was to merge. In the case of Schauman this was realised in 1987 when the company was merged with the much larger Kymmene Corporation. Schauman lost its name and the family its firm, but not at all the influence: the managers of Schauman got prominent positions in the Kymmene Corporation. Indeed, even the merger itself was boosted by the fact that the CEO of Kymmene, Casimir Ehnrooth, was a relative of the CEO of Schauman, Gay Ehnrooth (Monto, 1988; Näsi et al., 1998; Ojala, 2001b; Rinne, 1987; Schybergson, 1983a). For the family members the merger was most probably the only way to escape the deadlock. Ahlström had much better possibilities for even organic growth; it was already by the start of the century a huge company. The company went through a massive structural change from the turn of the 1980s and 1990s onwards. It lost its position among the most influential Finnish companies, but it ended up being among the world leaders in some specialised sectors. For the shareholders, the decisions were most probably painful, but also rewarding. It might even be argued that such a change was only possible for the firm with owners who had committed themselves to the long term development of the family firm. Furthermore, it might also be argued that this change enabled the survival of Ahlström in the long run. 3 STRATEGY PROCESS The investigation of the case companies’ strategic actions during the 20th century enables us to understand more deeply not only the strategic processes but also the evolution of these firms. In particular, within the wood processing industry the strategic choices made in the past have had influence on events years to come, due to the choices being often related to investments of massive production technology. Both companies had a relatively low numberr of strategic actions per year (Tables 7.1 and 7.2). This was mainly due to the small size of the firms. Still, the number of annual action grew all the time. Especially in the case of Ahltröm, the number of actions was relatively high (six per year on average) during the last period—a high figure in comparison to the other Finnish companies analysed in this volume. This activity was due to the restructuring of the company during the last decades of the 20th century.

AHLSTRÖM AND SCHAUMAN N Table 7.1.

Period 1 Period 2 Period 3 Period 4 Total

183

Number of actions per period, average annual number of actions (actions/year in a period), and the share of joint ventures per period, Ahlström. Years Number of actions 1851-1945 77 1946-1960 7 1961-1980 41 1981-2000 114 1851-2000 239

Actions per yearr Share of joint ventures 0.8 16 0.5 0 2.2 7 6.0 6 1.6 9

Sources: The database available at: http://www.cc.jyu.fi/~jaojala/.

Table 7.2.

Period 1 Period 2 Period 3 Period 4 Total

Number of actions per period, average annual number of actions (actions/year in a period), and the share of joint ventures per period, Schauman. Years Number of actions 1883-1945 37 1946-1960 12 1961-1980 40 1981-1999 23 (1987) 1883-1987 112

Actions per yearr Share of joint ventures 0.6 19 0.9 25 2.1 13 1.3 17 1.0

17

Sources: The database available at: http://www.cc.jyu.fi/~jaojala/.

About two thirds of the actions in both companies concentrated on the final products (Tables 7.3 and 7.4). The organic growth through the building up of new capacity and to some extent the acquisition of the existing capacity (smaller firms) was the main origin for growth in both companies. However, for Schauman organic growth had seemingly more importance. Galbraith uses the concepts of upstream and downstream strategies to describe the centre of gravity in an industry chain (Galbraith, 1983). In upstream there are the strategic choices related to the raw materials, and on the other end of the spectrum, in the downstream there are, for example, the strategic decisions related to sales of the customer products. Vertical integration forwards in production chain is one major strategic change that the case companies have faced during the post war era. Accordingly, the centre of gravity in the case of Ahlström has drifted towards the downstream strategy: the percentage of actions performed regarding the raw materials and semi finished products declined in the time period, whereas the percentage of actions performed with regards the finished products and marketing rose (Table 7.3). Ahlström was at the start of the century basically a saw milling company, which started to produce paper and later on focused on customer products and in particular on special papers. (Kunnas, 1978; Schybergson, 1992) In the case of Schauman there is a pattern of a declining share of the upstream strategy and growth in the actions related to downstream, though not as straightforward as in Ahlström (Table 7.4). Schauman was especially a producer of semi-finished products (pulp and engineered wood). The centre of gravity was more in the upstream strategy than in the case of Ahlström. Thus, the large share of final products from the strategic actions in the Schauman case is rather surprising. This

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can be explained by the plywood production, which was the third important sector for Schauman. Furthermore, Schauman also engaged in the construction industry by, for example, producing doors and windows. The fairly large share of Schauman’s actions related to the sales and marketing, which originates from the fact that the founding of a sales association for plywood failed. As a result, Schauman had to establish its own marketing organisation abroad. Table 7.3.

Ahlström’s strategic actions in the value chain. Percentage of strategic actions per period.

1. Raw materials (timberland etc.) 2. Sawmills 3. Pulp (mechanical and chemical) 4. Paper 5. Paperboard 6. Panel, plywood, veneer 7. Paper and board converting 8. Marketing and distribution 9. Other related 10. Multiple categories 11. Unrelated business Total

Period 1 Period 2 Period 3 Period 4 1 0 2 1 31 29 2 0 12 14 10 1 8 0 15 9 0 0 2 2 5 29 7 4 0 0 5 18 1 0 17 7 4 0 2 0 10 0 5 15 27 29 32 44 100 100 100 100

Average 1 11 6 9 1 6 9 7 2 11 36 100

Sources: The database available at: http://www.cc.jyu.fi/~jaojala/.

Table 7.4.

Schauman’s strategic actions in the value chain. Percentage off strategic actions per period.

1. Raw materials (timberland etc.) 2. Sawmills 3. Pulp (mechanical and chemical) 4. Paper 5. Paperboard 6. Panel, plywood, veneer 7. Paper and board converting 8. Marketing and distribution 9. Other related 10. Multiple categories 11. Unrelated business Total

Period 1 Period 2 Period 3 Period 4 5 0 3 0 24 0 8 26 5 25 8 0 0 0 5 0 3 0 0 0 30 33 20 4 0 0 23 9 5 17 10 13 0 0 0 0 5 8 8 9 22 17 18 39 100 100 100 100

Average 3 16 7 2 1 21 10 10 0 7 23 100

Sources: The database available at: http://www.cc.jyu.fi/~jaojala/.

The type of actions performed follows the pattern: the bulk of the actions concentrated on the founding or buying units (Tables 7.5 and 7.6). The relative share of closing and selling actions was much higher in the case of Ahlström. Mergers were avoided up to the late 1980s, when Schauman ceased to exists due to a merger and also Ahlström went through some merging operations. The rationalisation

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process of Ahström can be detected through the large number of units sold during the last period, although also in the case of Schauman there was a relatively large amount of units that were sold. Table 7.5.

Acquire, build, sell, and closure actions of Ahlström, %.

% Period 1 Period 2 Period 3 Period 4 Total

Acquire 15 0 12 39 23

Build d Togetherr 28 44 33 33 29 42 20 59 26 49

Selll 28 33 29 20 26

Close Togetherr 28 56 33 67 29 58 20 41 26 51

Total 100 100 100 100 100

Sources: The database available at: http://www.cc.jyu.fi/~jaojala/.

Table 7.6.

Acquire, build, sell, and closure actions of Schauman, %.

% Period 1 Period 2 Period 3 Period 4 Total

Acquire 11 0 28 39 22

Build d Togetherr 69 81 92 92 60 88 26 65 59 81

Selll 0 0 3 13 4

Close Togetherr 19 19 8 8 10 13 22 35 15 19

Total 100 100 100 100 100

Sources: The database available at: http://www.cc.jyu.fi/~jaojala/.

Internationalisation of the production was important in the case of Ahlström, but not in the case of Schauman (Tables 7.7 and 7.8). The difference in size most probably can explain the different attitude towards internationalisation. Following the typical development in Finland during the time period, both companies were involved in various kinds of cooperative agreements. Still, Schauman had seemingly more joint venture –type of actions, as can be seen in Tables 7.1 and 7.2. Table 7.7.

Domestic and internationall actions of Ahlström, %.

Period 1 Period 2 Period 3 Period 4 Total

Domestic 96 100 56 46 65

Internationall 4 0 44 54 35

Together 100 100 100 100 100

Sources: Database available at: http://www.cc.jyu.fi/~jaojala/.

186 Table 7.8.

JARI OJALA AND KALLE PAJUNEN Domestic and internationall actions of Schauman, %.

Period 1 Period 2 Period 3 Period 4 Total

Domestic 97 67 80 61 80

Internationall 3 33 20 39 20

Together 100 100 100 100 100

Sources: Database available at: http://www.cc.jyu.fi/~jaojala/.

4 CONCLUSION Family firms are accused of having several disadvantages compared to the listed companies. The limited ownership structure t creates constricted growth capabilities for the companies. Although family firms can be dynamic in the beginning, they cannot grow as fast as the listed companies due to financial factors. The willingness of the family members to invest more capital into the company might diminish when their family grows in size and, thus, the owners are no longer able to be involved in the daily affairs of the company. The change of leadership is always problematic in industrial enterprises, but especially difficult if it is in family firms, as the number of possible managerial candidates is relatively low, if the manager can only be chosen from their own family or kin. Nepotism and, related to that, conflicts within the family are among the most essential disadvantages in family firms (Casson, 1993; Rose, 1993). The importance of family ownership declines when the companies grow. Schauman and Ahlström m are also cases where the old family firm structure slowly faded away. Thus, many authors have emphasised managerial failure in family firms on the one hand, and the entrepreneurial decline on the other, as a result of the changing role of family firms (Coleman, 1973; Koiranen, 1998). Chandler even sees family ownership as a cause for stagnation in the economic growth in certain countries (Chandler, 1977, 1990). This condemnatory attitude towards family firms has lead to the underestimation of their importance in business history (Jones, 1999). Family firms are also often described as having several advantages. Entrepreneurial attitude towards business activities is a breeding ground for the dynamic, innovative behaviour in schumpeterian terms (Casson, 1982). Entrepreneurial management decreases bureaucratic structures, but it may also cause difficulties by disorganising the modes of operation. In family firms the needs of the family and firm are partly overlapping: what is good for the family is good for the business and vice versa. Thus, the commitment to the company by the owners is typically much tighter than in the other forms of enterprises. This is crucial in terms of the willingness to overcome the crises situations. However, in family firms considerable emphasis is also put on “social reproduction”, as described by Åberg (1991) and Müller (1998). That is, the “well-being” of the family members in a long term context. Social and cultural commitment can be detected, for example, from the common identity of the family members, as well as from the up growth of the younger family members to the common company and family values. Although

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family firms usually prefer steady growth, they are also able to perform quick changes and investment decisions as a result of the ownership structure. They do not have to prove the basis of their actions to shareholders. Therefore, family firms are sometimes considered as being more adaptive to changes in the market environment (Koiranen, 1998). Are issues like steady growth and dynamic actions seen in the strategy processes of these two Finnish wood processing companies? The simple answer is yes—even if, the processes are hard to pinpoint. Entrepreneurship and ownership advantages can be detected from the strategy processes of both companies. They performed several “quick” and large actions compared to their size, as was the case with Schauman during the 1970s when it established the new pulp plant. Ahlström was, of course, a much larger firm. However, even in the case of Ahlström entrepreneurship can be detected from the various quick and profound actions performed, which altered the structure as well as the strategy of the firm. It might be argued that these incremental changes were only possible in these firms due to their ownership structure: a typical feature in family firms is, as described by Koiranen (1998), the long run orientation. Thus, the family firm structure also created path dependencies for the development of the case companies. The commitment to the chosen strategy in the long run can be in particular detected in the case of Ahlström. Already during the 1970s, the company decided to redirect production towards specialisation, although at the same time the firm implemented operational investments that were “wrong” according to the “new” strategy (Kunnas, 1978). The strategy was realised in the late 1980s with the major structural changes. The facilities built up during the 1970s were sold out. The structural reorientation was carried out during the 1990s. A member of the management of Ahlström, Åke Gartz, stated in the late 1930s in a memo that Ahlström is, on the one hand, a family firm and in that sense the lowest possible indebtedness and liquidity are the major goals of the firm. On the other hand, Ahlström is also an industrial enterprise aiming for growth. According to Gartz these two goals were contradictory and caused trouble for the company. Gartz even submitted a proposition, that the ownership structure of the company should be changed, actually, in a similar way to the one performed about 60 years later (Schybergson, 1992). The view pointed out by Gartz stresses the problems of family firms engaged in the mature industry. The large investments related to the bulk production are impossible in the long run—just like it was the case with Schauman. Thus, it is rather surprising how Ahlström managed to survive up to the 21stt century with the family firm structure. Gartz was not the only one who has criticised the family ownership of the company during the past 60 years; the leading Finnish business magazine (Talouselämä) wrote several times, how impossible the ownership structure of Ahlström was (Rantanen, 1982; Rinne, 1983). Ahlström, however, survived by abandoning the bulk production during the late 1980s and by concentrating on the niche product. The company managed to escape the path dependencies, that is, from the attitude of producing products that the family had done for decades—the fact that was even stressed by the CEO Krister Ahlström in an interview in 1987 (Valjus, 1987).

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Was there an entrepreneurial decline or/and a managerial failure in these two family firms? One can speak about entrepreneurial decline in the sense that both companies had partially assigned the operational leadership to the professional managers after the founders of the companies (Antti Ahlström and Wilh. Schauman). However, several times throughout the 20thh century the CEO in both companies was a family member and the commitment by the large number of relatives was high all the time. The owner was “always concretely attend—the owners are truly concerned about the company, and the interaction between the management and owners is intensive”, as the Ahlström’s CEO Juha Rantanen described the situation in 1998. A similar argument was also given by Lars Mikander, the CEO of Ahlström, in 1978 (Kunnas, 1978; Lilius, 1998). Furthermore, entrepreneurial decline is not necessarily caused by professional managers, in many cases vice versa. Using managerial failure as an argument is also too strong when describing the firms, although they did both loose their major position in the Finnish economy by the end of the 1980s. Family members were nominated to the operating leadership only if they were capable of holding the positions. This can be clearly seen in the case of Ahlström: the family member Krister Ahlström was nominated as the CEO in 1981 only after he had made his career in another Finnish company, Wärtsilä. Despite the fact that both companies had active owners (family members), they both went through a “succession syndrome”, as Veranen (1996) describes it. That is, the ownership of the companies scattered to various members of the kin, which were no more interested in the company. In the case of Schauman, the ownership syndrome led to the merger of the company with Kymmene Corporation. In Ahlström, the growth of the family was also seen as a major problem. The director of the board, Börje Ahlström, stated in 1977 that the “fertility of the family has its price:” over one hundred family members owning the company can not be that much interested in the firm’s affairs. Börje Ahlström was convinced that in the long run the capital had to be acquired from outside of the family; after that decision there will be no more family firm called Ahlström (Monto, 1978; Annual Report of Ahlström 1977). The difficulties with its ownership structure led to the decision to abolish the family ownership. According to this study the family firm m structure caused problems and enabled certain strategic actions for the case companies. Family ownership was not an obstacle for growth. Both companies grew at least up until the 1980s as fast as the other Finnish wood processing companies. The competition, however, changed a lot during the 1980s. The ongoing consolidation process was the major change—and impossible for the independent family firms. Schauman was consolidated, while Ahlström avoided the “trend” by changing the focus of the production. Both companies were also active investors, although it is sometimes stressed that the family firms are not so eager to invest in new production technology. However, due to the massive investments, both companies were almost throughout the century in financial crises—but so were the listed wood processing companies also. The era of family owned enterprises in the wood processing industry is fading away. This can be seen from the cases of Ahlström and Schauman. Ahlström was still in the first years of new millennium in the process of dismantling the family

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firm structure. In the case of Schauman the change occurred about twenty years earlier. Competition, growth and consolidation in forest industries, especially in the pulp and paper sector, have lead to a situation where capabilities for independent family firms are restricted. The industry is involved in highly competitive international markets where the sales price is the most essential competitive factor. Thus, the companies have to build a more efficient production capacity—larger and more productive machinery—in order to lower the costs and gain scale advantages. The investment in the new and expensive production capacity is almost impossible for the family firms due to the costs—or at least highly risky. Conversely, in the family owned firms the commitment to the investments is usually considered in the long run perspective compared to the listed companies, who are more or less concerned about the shareholder value within the short run changes in share prices. To conclude, family firms are evidently today in a difficult position. It is no wonder that there is only one remaining Finnish family firm engaged in pulp and paper production, Myllykoski. Nor is it surprising, that the limited liability companies have acquired a number of family owned paper producers—like in 2001, when Finnish paper-giant UPM-Kymmene bought the largest German family owned paper manufacturer, Heindl. Ahlström (or Ahlstrom, that is the official name today), decided to split the company into three separate companies which all have separate missions. Ahlstrom Corporation continues as an industrial company, Ahlström Capital as an investment company, and A. Ahlstrom Osakeyhtiö maintains the family tradition that owns e.g. the old Noormarkku estate of the company (Annual Report of Ahlström 2000).

CHAPTER 8

ENTREPRENEURIAL ORGANIZATION OR FAMILY FIRM? A STRATEGIC ANALYSIS OF GULF STATES PAPER CORPORATION PATRICK M. KREISER Ohio University e-mail: [email protected]

1 INTRODUCTION Gulf States Paper Corporation was founded in 1884 under the guidance of Herbert Eugene Westervelt. Several generations off Westervelt’s descendents (most recently the Warner family) have managed the company and it is still family held at the beginning of the 21stt century. Throughout the last one hundred and seventeen years, the leadership at Gulf States Paper has emphasized ideals and values as the cornerstone of the business. Mildred Warner, the second President of the organization, felt that the company should always strive to possess four virtues: patience, faith, vision, and determination. Even though Gulf States Paper has changed its strategic direction several times over the last century, the company has still been able to achieve several of its main organizational objectives, namely financial security and family control of the business. Gulf States Paper has experienced slow but steady growth over its one hundred years plus of operation. However, the company has experienced this growth without a great deal of external strategic actions, such as mergers and alliances. Instead, the company has been very tightly held and managed. The firm’s growth strategy has consisted mainly of acquisitions and expansion, strategies such as the building of new mills, the purchasing and development of new equipment, the procurement of forestland, etc. Gulf States Paper has tended to be rather inward-looking as an organization, and in the words of Jack Warner, “one hundred years after its founding, Gulf States Paper is still a small, privately held corporation, not bound to Wall Street” (Fletcher, 1984: vii). 191 Juha-Antti Lamberg, Juha Näsi, Jari Ojala, and Pasi Sajasalo (eds.), The Evolution of Competitive Strategies in Global Forestry t Industries: Comparative Perspectives, 191–204. © 2006 Springer. Printed in the Netherlands.

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In this paper, I will trace the historical and strategic development of Gulf States Paper Corporation since its founding in 1884. An analysis of the company’s enacted strategies will provide insights into the strategic actions of Gulf States in relation to those of its competitors. There is no doubt that Gulf States Paper has been run differently than many companies in the industry and has been managed much more closely than many of its competitors. Thus, a major portion of the paper will examine the evolution of Gulf States’ strategic direction over the last one hundred and seventeen years. Specifically, the major strategic actions thatt Gulf States Paper have enacted since 1884 will be classified along three dimensions. The first dimension will examine the stage in the production chain where the action occurred. The second dimension will depict the type of action that was enacted, and whether it was an opening or closing action. The final dimension will categorize whether each action was done in the domestic or international market. Particularr emphasis will be placed on the emergent strategies that have developed within Gulf States Paper in response to the many environmental pressures that exist in the paper and pulp industry (Mintzberg & Waters, 1982; Mintzberg & Waters, 1985). I will also examine the question of whether the company can be more accurately described as an entrepreneurial organization or a family firm. The extant literature posits that entrepreneurial organizations exist primarily with short-term profit goals in mind, while family firms are most concerned with the long-term survival of the organization. Drawing primarily upon the entrepreneurship and small business literature, this paper will perform an in-depth analysis of the organizational strategies enacted by Gulf States Paper over its nearly one hundred and twenty years of existence in an effort to answer this intriguing question. 2 THE PERFORMANCE-BASED VIEW OF ENTREPRENEURIAL ORGANIZATIONS 2.1 Characteristics of Entrepreneurial Firms Organizational researchers have often conceptualized entrepreneurial organizations as possessing three main characteristics: innovation, risk-taking, and proactiveness (Covin & Slevin, 1989; Miller, 1983; Miller & Friesen, 1982). Such an entrepreneurial orientation (EO) is demonstrated by the “extent to which top managers are inclined to take business-related risks (the risk-taking dimension), to favor change and innovation in order to obtain a competitive advantage for their firm (the innovation dimension), and to compete aggressively with other firms (the proactiveness dimension)” (Covin & Slevin, 1988, p. 218). Previous research efforts suggest that, in certain situations, firms exhibiting high levels of entrepreneurial orientation will achieve superior performance to firms possessing low levels of entrepreneurial orientation (Covin & Slevin, 1991; Zahra, 1993; Zahra & Covin, 1995). Indeed, recent studies indicate that increases in firm performance related to EO are sustainable over long periods of time (Wiklund, 1999), but that this relationship may be contingent on the environmental context in which the firm is operating (Covin & Miles, 1999; Lumpkin & Dess, 1997; Zahra,

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1993; Zahra & Covin, 1995). Aggregated measures of entrepreneurial orientation have also been linked to other important determinants of firm performance, such as marketing orientation (Morris & Paul, 1987; Slater & Narver, 2000), strategy formation (Doh, 2000; Knight, 2000) and employee satisfaction (Pearce, Kramer, & Robbins, 1997). Miller and Friesen theorized that product-market innovation, proactiveness of decision-making, and risk-taking separated entrepreneurial firms from nonentrepreneurial firms (Miller & Friesen, 1982). Miller (1983) further refined this argument, claiming that an “entrepreneurial firm is one that engages in productmarket innovation, undertakes somewhat risky ventures, and is first to come up with ‘proactive’ innovations” (Miller, 1983, p. 771). 2.2 Risk-taking, Innovation, and Proactiveness Previous organizational research provides strong theoretical support that three unique dimensions should be included when measuring the entrepreneurial nature of a firm: innovation, risk-taking, and proactiveness. Numerous researchers have argued that all three of these dimensions (innovation, risk-taking, and proactiveness) should be aggregated together in order to assess a firm’s level of entrepreneurship, and that a truly entrepreneurial firm would exhibit high scores on all three dimensions (Covin & Slevin, 1989; Miller, 1983; Miller & Friesen, 1982). 2.2.1 Risk-taking The concept of risk-taking has long been associated with entrepreneurship. Early definitions of entrepreneurship centered on the willingness of entrepreneurs to engage in calculated business-related risks (Brockhaus, 1980, 1982). In the 1800’s, John Stuart Mill argued that risk-taking was the paramount attribute of entrepreneurs (Brockhaus, 1982). This view of entrepreneur as risk-taker continued to gain support throughout the twentieth century, as McClelland (1960) posited that “practically all theorists agree that entrepreneurship involves, by definition, taking risks of some kind” (McClelland, 1960, p. 210). McClelland’s argument was based on the notion that entrepreneurs would be high in their need for achievement, and would thus be moderate in the propensity to take risks. Situations that involved little or no risk did not satisfy the entrepreneur’s need for achievement; situations that were too high in risk were based predominantly on luck and not the skill of the entrepreneur (McClelland, 1960). Begley and Boyd (1987) found that risk-taking had a curvilinear relationship with performance in entrepreneurial firms. Their findings suggested that entrepreneurs exhibiting moderate levels of risk-taking would outperform those exhibiting either very high or very low levels of risk. The authors concluded that “risk-taking has a positive effect on ROA up to a point. Beyond that point, increases in risk-taking began to exert a negative effect on ROA” (Begley & Boyd, 1987, p. 89). Research also suggests that entrepreneurs tend to categorize business situations as possessing less risk than non-entrepreneurs (Busenitz, 1999; Palich & Bagby,

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1995). In other words, “entrepreneurs may not think of themselves as being any more likely to take risks than non-entrepreneurs, but they are nonetheless predisposed to cognitively categorize business situations more positively” (Palich & Bagby, 1995, p. 426). 2.2.2 Innovation Other researchers considered innovation to be at the very heart of entrepreneurship (Covin & Miles, 1999; Jennings & Young, 1990; Schollhammer, 1982; Schumpeter, 1934, 1942). Entrepreneurial innovation can be defined as the “willingness to support creativity and experimentation in introducing new products/services, and novelty, technological leadership and R&D in developing new processes” (Lumpkin & Dess, 2001, p. 431). Schumpeter (1934, 1942) was one of the first scholars to argue that innovation, as evidenced by the creation and development of new products and processes, was the fundamental undertaking of the entrepreneurial organization. Jennings and Young (1990) defined corporate entrepreneurship as “the process of developing new products or new markets. An organization is entrepreneurial if it develops a higher than average number of new products or new markets within that industry” (Jennings & Young, 1990, p. 55). Zahra (1993) examined the relationship between new product innovation and competitive strategy in small firms, arguing that a “distinguishing characteristic of an entrepreneurial company is its strong commitment to creating and introducing new products to the market, especially well before the competition” (Zahra, 1993, p. 47). Covin and Miles (1999) theorized that innovation was the single most critical factor in defining corporate entrepreneurship. After a consideration “of the various dimensions of firm-level entrepreneurial orientation identified in the literature, it is argued that innovation, broadly defined, is the single common theme underlying all forms of corporate entrepreneurship” (Covin & Miles, 1999, p. 47). While they did not dismiss the existence of other dimensions of entrepreneurial orientation, they felt that these other dimensions were antecedents, consequences, or correlates of innovation. However, they concluded that “without innovation there is no corporate entrepreneurship regardless of the presence of these other dimensions” (Covin & Miles, 1999, p. 49). 2.2.3 Proactiveness While numerous studies have examined the role that risk-taking and innovation assume in determining a firm’s level of entrepreneurial orientation, the concept of proactiveness has received less attention from entrepreneurial scholars. The preponderance of research that has been done on the topic posited two main attributes of proactiveness: 1) aggressive competitive behavior directed at rival firms, and 2) the organizational pursuit of favorable business opportunities (Knight, 1997; Lumpkin & Dess, 2001; Stevenson & Jarillo, 1990). The majority of these studies have found that entrepreneurial firms must successfully match their competitive strategy to their external environment, and that the fit between these two

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variables will ultimately determine firm performance (McGee, 1996; Miles, Arnold, & Thompson, 1993). Knight (1997) argued that the emphasis of proactiveness is on “aggressive execution and follow through, driving towardd achievement of the firm’s objectives by whatever reasonable means are necessary” (Knight, 1997, p. 214). Porter (1980) posited that, in certain situations, firms could utilize proactive behaviors in order to increase their competitive position in relation to other firms. Lieberman and Montgomery (1988) argued that first-mover firms were able to gain significant advantages over follower firms. They defined such first-mover advantages in terms of the ability of pioneering firms to earn higher economic profits through such advantages as technological leadership and increased buyer switching costs (Lieberman & Montgomery, 1988, p. 41). Stevenson and Jarillo (1990) studied the formation of proactive behaviors in entrepreneurial firms. In their research study, they conceptualized proactiveness as the organizational pursuit of business opportunities that were deemed by the firm to be positive or favorable. This view is consistent with a recent definition offered by Lumpkin and Dess (2001), in which proactiveness is viewed as an “opportunityseeking, forward-looking perspective involving introducing new products or services ahead of the competition and acting in anticipation of future demand to create change and shape the environment” (Lumpkin & Dess, 2001, p. 431). 3 THE LONGEVITY-BASED VIEW OF THE FIRM A competing view of the firm is based on the premise that long-term survival, not financial performance, should be utilized to ultimately judge the success of an organization (Brenneman, Keys, & Fulmer, 1998; de Geus, 1997a). De Geus (1997a) described companies that were successful over the long-term as ‘living companies’, firms that were able to adapt and evolve throughout their history. De Geus drew a “distinction between ‘economic companies,’ which are run as profit machines, and ‘living companies,’ whose primary purpose is to survive and perpetuate themselves as ongoing communities” (Stamps, 1997). Table 8.1 lists several of the major differences between economic and living companies. De Geus noted that “mounting evidence suggests thatt corporations fail because their polices and practices are based too heavily on the thinking and the language of economics…companies die because their managers focus exclusively on producing goods and services and forget that the organization is a community of human beings that is in business – any business – to stay alive” (de Geus, 1997a, p. 52). De Geus claimed that the majority of organizations that were able to survive and prosper over long periods of time often shared many of the same characteristics. According to de Geus, these successful organizations a shared four specific attributes in common with one another: 1) financial conservatism, 2) sensitivity to the world around them, 3) awareness of their identity, and 4) tolerance of new ideas. These characteristics did not just describe the strategies t employed by these companies, they described the entire mindset of the corporation. Organizations that embraced these values were more likely than other firms to enjoy long-term success, as “these

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four traits form the essential character of companies that have functioned successfully for hundreds of years” (de Geus, 1997a, p. 54). Table 8.1.

Characteristics of Economic Versus Living Companies.

Definition Purpose Management Priority Types of Employees Executive Promotion Governance

Learning Abilities

Economic Companies Corporate machine Achieving maximum profits while using minimum resources Maximize profits; People are used as a means to an end Typically “outsiders” who show little loyalty to the company Executives are usually brought in from the outside Will sacrifice people in order to maximize profits and shareholder value Centralized control reduces the company’s ability to learn

Living Companies Living work community To ensure the longevity of the corporation Increase company’s potential; Profits are a means to an end Members of a community that hold certain values in common Executives are promoted from within the organization Will sacrifice assets over people to ensure the company’s long-term survival Trust and tolerance allow the company to embrace learning

Source: Adapted from Chambers (1997).

The first characteristic of these organizations, financial conservatism, allowed these companies to save spare money that might be useful in the pursuit of future business opportunities. Instead of spending their money all at one time and in a haphazard manner, financially conservative organizations invested their money carefully and only after putting a great deal of thought into the investment. Such companies “understood the meaning of money in an old-fashioned way; they knew the usefulness of spare cash…Money in hand allowed them to snap up options when their competitors could not” (de Geus, 1997a, p. 53). Sensitivity to the world around them was the second characteristic of living companies. This meant that companies were able to learn from and adapt to their external environment. Even though the environment was constantly changing around them, these firms maintained flexible strategies and an open-minded posture that allowed them to change with the environment. A living company recognized that it “can not control its environment. Rather it must learn to continuously adapt to it” (Kelly, 1997). The open-minded exchange that existed between organizations and their environment allowed these firms to “adapt themselves to changes in the world around them…they were good at learning and adapting” (de Geus, 1997a, p. 54). According to de Geus, the third characteristic that helped organizations to achieve long-term prosperity was an awareness of their own identity. In other words, everyone involved with the organization felt like they were part of a larger community, that the actions of individuals were all part of a larger whole. This sense of community helped bring together employees and managers, helped decrease divisiveness between different divisions within corporations, and helped nurture relationships between corporations and their customers. At the most basic level,

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individuals within these firms embodied a “feeling of belonging to an organization and identifying with its achievements…Case studies repeatedly show that a sense of community is essential for long-term survival” (de Geus, 1997a, p. 54). The final characteristic of ‘living companies’ is that they tend to be tolerant of new and innovative ideas. Instead of fearing the unknown, these companies thrive on uncertainty and realize that opportunity is often the twin sister of change. While other companies become tied to old ideals and established practices, living companies are willing to try new things in an effort to improve their current standing. The emphasis on trying new ideas and experimenting with new concepts stresses the important role that learning plays within these organizations (Brenneman, Keys, & Fulmer, 1998; de Geus, 1997a). The willingness of these companies to experiment and to develop innovative products and processes often allows them to take a position of technological leadership within their industry. Taken together, these four characteristics are extremely similar to many of the attributes typically associated with family firms. Family firms are often financially conservative, since a common rationale given for the creation of a family firm is to provide for several generations of family descendents. These firms also tend to have very strong identities, and maintain a willingness to adapt to the world around them, all characteristics associated with de Geus’s ‘living companies.’ As such, it is expected that Gulf States Paper would embody many of the same characteristics posited for these types of organizations. This paper will attempt to answer the question of whether Gulf States Paper can a be more accurately described as an entrepreneurial organization or a family firm. In order the address this query, we must first trace the strategic development that has taken place within the organization over the last one hundred and seventeen years since the company’s founding. 4 GULF STATES PAPER CORPORATION 4.1 Company Background Gulf States Paper Corporation is a privately held company that currently employs more than 2,900 employees in 10 states. The company is the third largest supplier of SBS folding boxboard and one of the nation’s top 10 folding carton manufacturers (http://www.gulf-states.com). In 1998, the company’s annual revenues were approximately $500 million (Gulf States Paper Corporation: Turning the page, 1998). Founded in 1884, the company has experienced slow but steady growth over its nearly one hundred and twenty years of existence. The company has also continued to diversify its operations and expand its strategic vision during this time period. In the late 1800’s, the company made wrapping paper from wheat straw in its Marseilles, Illinois plant. Gulf States Paper, now headquartered in Tuscaloosa, Alabama, has diversified into new product areas in the 20th century. The company currently consists of five distinct operating divisions: 1) Natural Resources, 2) Wood Products, 3) Pulp & Paperboard, 4) Paperboard Packaging, and 5) Business Solutions.

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The Natural Resources division of Gulf States Paper owns and manages over 400,000 acres of timberland in its home state of Alabama. The Wood Products division has more than fifty years of manufacturing experience, and produces a “wide variety of high-performance products from Southern yellow pine for customers in both domestic and international markets” (http://www.gulf-states.com). The third division, Pulp & Paperboard, is the third largest supplier of bleached paperboard for folding cartons in the nation. The Paperboard Packaging division of Gulf States Paper concentrates primarily on meeting the packaging needs of a wide variety of customers and consumers. The final division, Business Solutions, is the newest division in the company. This division was created in order to provide consulting and management services to both individuals and small businesses. 4.2 Strategic Analysis 1884-1930: A Period of Early Growth When Westervelt first established the company in 1884, a small paper mill in Marseilles, Illinois was utilized to make wrapping paper from wheat straw. Westervelt quickly expanded the organization, selling the Marseilles mill in 1886 and acquiring a larger one in Springfield, Illinois. Throughout its early years, the company made many strategic maneuvers emphasizing the acquisition and sale of company assets. Immediately after purchasing the mill in Springfield, Westervelt purchased entirely new machinery in order to ensure that that his products would meet the quality expectations of his customers. In 1893, Westervelt named the organization the Prairie States Paper Company, sold the Springfield mill, and established a new mill in Taylorville, Illinois. Over the next ten years, the company expanded its operations to include businesses in Tennessee, Virginia, and Indiana. The company, among other things, now developed sugar bag machines that were at the very fore front of the industry, due in large part to the money and time the company had invested in developing new production processes. In 1903, the E-Z Opener Bag Company was created, with its main operations in South Bend, Indiana and Fulton, New York. The period of quick expansion continued for the company. During the early 1900’s, the company opened plants in San Angel, Mexico, Decatur, Illinois, and Orange, Texas. It was the plant in Texas, which began to manufacture a new type of paper bag made from southern pine trees, that convinced Westervelt that the future of the company ultimately lay in the Southern United States. Gulf States Paper would be one of the first companies in the industry to establish itself in the southern market. In 1916, the company (still known as the E-Z Bag Opener Company) leased a plant in Braithwaite, Louisiana. Although few companies had previously manufactured paper products from southern pine trees, Westervelt was convinced that these affordable trees could provide the high quality of bags that the company wanted to produce. In the late 1910’s, the company closed the plants in Mexico and Taylorville, and sold the building in Fulton, New York. It was now clear that the EZ Bag Opener Company planned to move south. The only question was whether or not to remain in the Louisiana plant, which had fallen victim to several floods of the Mississippi River, or to move to another location in the Deep South.

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At the same time that the company expanded into Louisiana, another very important change was taking place inside the company. In 1922, the company purchased several thousand acres of timberland, their first venture into forest ownership. Being able to maintain a constant supply of timber was thought to be essential to the company’s well-being, and the purchase of this timberland would start a trend that lasted throughout the entire 20th century. In 1927, the company decided to move its operations to Tuscaloosa, Alabama, and completed a mill there in 1929. The company also renamed itself in 1928 to reflect its new location, now calling itself by its current name of Gulf States Paper Corporation. 4.3 Strategic Analysis 1930-1980: The Company Begins to Expand The opening of the new plant in Tuscaloosa began another period of continuous expansion for Gulf States Paper Corporation. By the early 1930’s, Gulf States had consolidated their plant operations in Illinois, Texas, and Louisiana to the plant in Tuscaloosa. Throughout the rest of the decade, the company invested in new machines for the plant in Alabama, as almostt all of the machines were considered to be top-of-the-line by industry standards. In 1938, Mildred Warner (the daughter of Herbert Eugene Westervelt, the company founder) was named President of Gulf States Paper Corporation. Even though a transition was beginning the take place at the top of the management structure, the company continued to be run as a family firm. In 1946, Gulf States developed a new, innovative furnace that was able to minimize the amount of odor that was created during the papermaking process. Gulf States was also starting to become very involved in another area: forest products. In 1947, the company organized a new forestry division and formed a public relations committee to emphasize good forest practices. Gulf States was already ahead of their time in marketing itself as an environmentally-friendly firm. By 1948, the company already held approximately 150,000 acres of timberland. This number continued to increase over the next several decades. The 1950’s found the company exploring further expansion of their production capabilities. A new mill was built in Demopolis, Alabama in order to handle the continued growth and expansion of the company. The Demopolis mill was one of the first mills in America to practice the ‘crew concept’ of management, which emphasized the use of teams and collaborative partnerships between employees. The mill was also the first in the paper industry to build a continuous digestor. The company also developed programs for the management of wildlife resources and formed an art department to create new designs for the company’s sacks and bags. In 1957, Jack Warner (Mildred Warner’s son) became the new President at Gulf States Paper. The trend of family leadership within the firm continued. In the 1960’s, Gulf States started to diversify their production capabilities. The company was now involved in numerous industries, such as the food carton industry and the production of bleached paperboard. The amount of forest land owned by the company had now increased to over 350,000 acres and plants were now located in New York, Illinois, Ohio, Maryland, North Carolina, Georgia, Florida, Alabama, Texas, Kentucky, and Iowa. The company was also one of the first firms in the

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paper industry to use a closed-loop computer in order to make their production processes more efficient. In 1970, the company built new headquarters in Tuscaloosa and decided to enter the real estate business in an attempt to boost profitability. The company also developed a multi-million dollar water pollution control project in Tuscaloosa in an effort to establish Gulf States’ reputation as an environmentally-conscious corporation. However, the end of the 1970’s saw an economic downturn in the United States. The company needed to streamline their operations in order to maintain a consistent level of profitability. Several machines in the Tuscaloosa plant were retired and numerous jobs were eliminated. These cost-saving measures were not enough, though, and in 1979 the Tuscaloosa plant was closed. The Demopolis plant continued to stay open, and the company’s headquarters remained in Tuscaloosa, but the plant that had overseen the company through fifty years of expansion was no longer able to function in an efficient and profitable manner. 4.4 Strategic Analysis 1980-2001: An Outward-looking Perspective Over the last twenty years, Gulf States Paper has continued to reinvent itself as a corporation. Although the firm was rather inward looking over the first one hundred years of its existence, the last several decades have brought about a fundamental change in the company’s business philosophy. This period has seen the company continue to diversify its product line, enter into numerous joint ventures and strategic alliances, make several acquisitions, and attempt a transition from familyrun to professional management. Gulf States Paper has also continued to place an emphasis on building strong relationships with its customers and its community. The company has been very active in philanthropic activities in the Tuscaloosa community and has also donated money to local educational institutions, most notably the University of Alabama. In the early 1980’s, pressure from governmental and political organizations concerned with saving the external environment continued to increase in the paper and pulp industry. As such, Gulf States Paper implemented process changes that eliminated dioxin formation during the production process that had previously been a danger to the natural environment. During this period, the company also began to pursue numerous strategies that had not received much attention from management in the past. The first of these changes in strategic orientation would be the emphasis that Gulf States would place on joint ventures and strategic alliances during the 1990’s. During this period, the company entered into cooperative agreements with various other companies in the industry or complementary industries. Joint ventures and alliances either created or established relationships with GSD Packaging, Siman Packaging, Resolution Packaging, and the Livingston Box Company. The company also acquired Fold-Pak Corp, Amco Folding Cartons, and Laird Packaging in the 1990’s. The company also formed the Business Solutions Group, whose purpose was to “provide consulting, packaging development, forestry and wildlife management services in a confidential and secure manner” (http://www.gulfstates.com).

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One of the most significant cooperative agreements undertaken by Gulf States Paper during this time period was the joint venture established with Georgia-Pacific Corporation in 1997. The agreement between these two companies was for the sale and marketing of solid bleached sulfate (SBS) paperboard. Both companies produced SBS paperboard according to the same specifications, which was then sold by Gulf States Paper as part of its CartonMate product line. However, plans were announced to end this cooperative agreement at the end of 2001. In 1998, Gulf States canceled plans to add a second bleached paperboard machine to its mill in Demopolis. The company had established preliminary plans in 1995 to expand the mill in order to increase its overall capacity. However, increased output due to the soon-to-be-defunct joint venture with Georgia-Pacific, as well as stabilizing domestic and worldwide demand, caused Gulf States to rethink the expansion of the Demopolis mill. Mike Case, company CEO, claimed that “our market research has clearly shown that this is not the time to move forward with a major expansion project” (Gulf States won’t add to Alabama mill, 1998). The company also underwent a transition from family management to professional management during the last twenty years. Although Jon Warner (Jack Warner’s son) is currently the Chairman of the Board, several non-family members have held key management roles inside the corporation during the last decade. In 1993, Ed Woods became President of the company and was named CEO in 1995. Although Woods had long worked for the company, this signaled a significant change to the company’s policy of promoting from within the family. Also, the appointment of Mike Case in 2000 to succeed Ed Woods as CEO of Gulf States Paper Corporation continued the trend towards professional management occurring within the organization. 4.5 The Strategic Development off Gulf States Paper Corporation Throughout the twentieth century, the strategies enacted by Gulf States Paper Corporation have been formulated with two main issues in mind: 1) security and 2) control. The financial conservatism that has been so typical of the company, as well as the lack of willingness by top managementt to take extreme risks, has been an effort to maintain the financial security of the company. The continuous diversification of Gulf States’ product line has also helped diminish the company’s overall risk of poor economic performance (Freeman & Hannan, 1983). The more recent use of mergers and acquisitions by Gulf States in the face of environmental pressures is also a common strategy employed by organizations in uncertain environments (Freeman, Carroll, & Hannan, 1983; Hannan & Freeman, 1977). The second goal of the company during this time period has been to maintain Gulf States’ status as a privately-held, family firm. Although the company has moved more towards professional management over the last decade, Gulf States Paper is still owned and controlled by the Warner family at the beginning of the twenty-first century. Over the last one hundred and seventeen years, the strategic vision of Gulf States Paper Corporation has continued to evolve and change. Due to environmental pressures, the company has become more outward-looking in orientation over the

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last several decades. During the first century of the company’s operations, very little emphasis was placed on “mergers or even bankruptcy, the easy ways out – methods that became popular jumping-off places for other companies” (Fletcher, 1984: viii). However, the organization has become much more involved in the use of strategic alliances, mergers, and acquisitions over the last twenty years. An analysis of the company’s actions in the production chain help illustrate the changes that have taken place in the organization’s strategies since its founding (Table 8.3). Actions involving paper have accounted for nearly one-third of the company’s strategic actions, actions involving paper and board converting have accounted for approximately twenty per cent of the company’s actions, and actions in multiple categories have accounted for approximately twenty-three per cent of the company’s total strategic actions. However, the increase in the percentage for actions pertaining to multiple categories over the last several time periods is indicative of the continued emphasis that the company has placed on forming cooperative agreements (considered to be multi-level strategies) over the last three or four decades. Table 8.2.

Number of actions per period, average annual number of actions (actions/year in a period), and the share of joint ventures per period, Gulf States Paper (per cent shares). Years

Period 1 Period 2 Period 3 Period 4 Total Table 8.3.

Number off actions

Actions perr yearr

57 23 17 17 114

1 2 1 1 1

1851-1945 1946-1960 1961-1980 1981-2000 1851-2000

Share of joint ventures 2 0 0 29 5

Joint ventures 1 0 0 5 6

Gulf States Paper – Actions in Production Chain.

1. Raw materials (timberland etc.) 2. Sawmills 3. Pulp (mechanical and chemical) 4. Paper 5. Paperboard 6. Panel, plywood, veneer 7. Paper and board converting 8. Marketing and distribution 9. Other related 10. Multiple categories 11. Unrelated business Total

Period 1 Period 2 Period 3 Period 4 2 21 6 0 0 0 6 0 2 13 0 0 47 25 18 12 0 4 0 6 0 0 0 0 28 8 0 29 4 0 0 0 0 0 12 0 11 25 41 47 7 4 18 6 100 100 100 100

Total 6 1 4 33 2 0 20 2 2 23 8 100

On the other hand, an analysis of the types of strategic actions practiced by Gulf States Paper shows that the types of strategic actions have remained relatively stable

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since the company’s inception (Table 8.4). Over eighty per cent of the company’s total strategic moves involved the acquisition and building of business units, mills, warehouses, etc. During this same time period, less than twenty per cent of the company’s strategic actions involved selling and closing actions. Specifically, Gulf States has primarily utilized building actions (almost seventy per cent of total actions), acquisitions (approximately fourteen n per cent of total strategic actions), and closing actions (approximately fourteen per cent of total strategic actions) throughout the company’s history. Table 8.5 also clearly illustrates that Gulf States has operated solely in the domestic market for the entire life of the company. Taken together, both of these analyses indicate that the types of strategic actions practiced by Gulf States Paper have not changed dramatically over time. 4.6 Gulf States Paper: Entrepreneurial Organization or Family Firm? Gulf States Paper has not embodied the prototypical characteristics of an entrepreneurial firm since its founding. The company has not been overly willing to take risks nor has the company been extremely proactive in its decision-making. For the first one hundred years of the firm’s existence, it was an extremely tightly managed company that tended to maintain a very inward looking perspective. Over the last twenty years, the company has become more involved in proactive behaviors (alliances, joint ventures, etc.), but it would still be a stretch to consider the company to be extremely aggressive in its strategic posture. The company has also tended to be very cautious when taking risks, preferring instead to employ more traditional strategies (buying mills, expanding production, etc.) until recently. As such, a strong case can be made that Gulf States Paper has not been overly entrepreneurial in its orientation over much of the company’s history. Table 8.4.

Gulf States Paper – Types of Actions (Opening / Closing).

Period 1 Period 2 Period 3 Period 4 Total Table 8.5.

Acquire 25 0 0 0 14

Build d Togetherr 53 78 94 94 83 83 83 83 68 83

Selll 6 0 0 0 3

Close Togetherr 16 22 6 6 17 17 17 17 14 17

Gulf States Paper – Types of Actions (Domestic / International).

Period 1 Period 2 Period 3 Period 4 Total

Domestic 100 100 100 100 100

Internationall

Together 100 100 100 100 100

Total 100 100 100 100 100

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However, Gulf States Paper has embodied many of the characteristics often associated with family firms. Specifically, the strategies enacted by the company have been in keeping with de Geus’s description of the ‘living company.’ Gulf States has been financially conservative since its founding, willing to spend money when need be, but also avoiding excessive amounts of corporate spending. The company has also been sensitive to the world around it and tolerant of new ideas, two other characteristics associated with such firms. The company’s geographic expansion and the diversification of its product line indicate that the firm has been willing to adapt to changes in its external environment. Gulf States has also been very aware of their own identity, the final characteristic hypothesized for ‘living companies.’ The company has also maintained very strong relationships with its customers and its community, marketing itself as a firm that is reliable and trustworthy. De Geus’s assertion that these four characteristics should lead to longterm organizational survival is certainly accurate in the case of Gulf States. While many other firms have come and gone in the last one hundred seventeen years, Gulf States has continued to survive in the paper and pulp industry. In conclusion, Gulf States Paper Corporation has more closely embodied the characteristics of a family-run firm than an entrepreneurial organization throughout the company’s history. Although the organization has been managed much differently than many other firms in the paper and pulp industry, Gulf States Paper has continued to endure for almost one hundred and twenty years. However, an analysis of the company’s actions along three important strategic dimensions suggests that the firm has become much more outward-looking in orientation over the last twenty years. This fact lends even stronger support to the classification of Gulf States Paper as a ‘living company.’ As economic and competitive factors have changed within the paper and pulp industry, the company has continued to evolve its strategic orientation in order to match the demands of the firm’s external environment. As such, Gulf States Paper has continued to survive in an everchanging industry as the company crosses the threshold into the twenty-first century.

CHAPTER 9

MANAGERIAL COGNITION AND ACTION IN THE CONTEXT OF THE FORESTRY INDUSTRY PASI SAJASALO University of Jyväskylä e-mail: [email protected]

1 INTRODUCTION Social contexts such as industries differ from one another in exceedingly many respects, be it the size of an industry in terms of combined sales or number of competitors, technologies utilized or their rate of change, stage of industry life cycle, amount of regulation, their interest to the investment community, or the like. Therefore, we believe that it is beneficial to attempt to build theories and models that suit industry conditions, and that allow the important features of the given industry to be taken into account in order to understand, and ultimately explain the discernible developments that we see around us in the real world. Consequently, the aim of this chapter is to embark on a journey that will hopefully take us closer to a theory of managerial cognition and action in the context of the forest industry. This is because we believe that context matters – a great deal in fact – as will be demonstrated later. This chapter is divided into four parts. Following the introduction, discussion of the role of information and other closely related factors for managerial cognition and action, and for decision-making in general, is presented. The third part discusses how some predominantly mental constructs may be seen as factors conditioning managerial cognition and decision-making, and how these factors manifest themselves in the strategic action of forest industry companies in light of the case evidence in the volume. The last part presents a discussion of the central ideas of the suggested theory of managerial cognition and action in the forest industry context, followed by conclusions.

205 Juha-Antti Lamberg, Juha Näsi, Jari Ojala, and Pasi Sajasalo (eds.), The Evolution of Competitive Strategies in Global Forestry t Industries: Comparative Perspectives, 205–224. © 2006 Springer. Printed in the Netherlands.

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2 INFORMATION, MANAGERIAL COGNITION AND ACTION Due to the various changes occurring constantly both within and outside any organisation in any given industry at any given time, information, knowledge and learning have recently been suggested as important success factors for contemporary business organisations. As the previous chapters have aptly shown us, there have been changes in both the outer and inner environments affecting the performance of forest industry companies, even if the changes have traditionally occurred at a somewhat sluggish pace. As a result of changes occurring in an organisation’s environments, in order to be able to function an organisation needs to somehow become aware of these in order to be able to assess how they may affect its prospects for survival. This ability may be considered crucial. If one accepts the idea that an organisation should be in alignment with its environment in order to thrive (Nelson & Winter, 1982; Hannan & Freeman, 1989), being aware of what is taking place in the organisation’s outer environment becomes an essential question. The same applies to the importance of familiarity with the organisational resources and capabilities available to enable this alignment in changing circumstances. While information and knowledge are often treated synonymously and used almost interchangeably, working definitions utilized in this chapter to make a distinction between them are as follows: information is seen as data that contains meaning due to human interpretation, and that helps to reduce uncertainty. Knowledge emerges through cognitive processing of information and is thus a quality closely tied to a person. It may be seen as internalised information and especially as the capacity to put information that has been internalised to use. The basic distinction between information and knowledge, therefore, comes from the ability to put information into practice: only then does information become knowledge (Devlin 1999, 15). Information regarding the state and development of the competitive environment is of the utmost importance if a business organisation is to assess the likely effects of its strategic choices on its performance (e.g. Yasai-Ardekani & Nystrom, 1996), or more generally, even try to plan ahead (Auster & Choo, 1994; Choo, 1994). Information, therefore, has a critical role to play in managerial work as pointed out, for instance, by Mintzberg (1973, 71–72) and Auster and Choo (1994, 1): Information is the raw material of managerial work. … Customer preferences, competitor strategies, technological advancements, government regulations, and social and economic conditions are all in a constant state of flux. Learning about developments in the environment thus becomes a critical activity of senior managers who are responsible for the survival and performance of their organisations.

Despite the recognition of the importance of information and knowledge as critical success factors for business organisations, perhaps surprisingly the motives for information acquisition and the underlying ways of utilizing information to gain and maintain competitive advantage have received considerably less attention as Makadok and Barney (2001, 1636) note: It is, in many ways, ironic that research in the field of strategic management has proceeded for so many years without a theory of information acquisition strategy tied to

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the creation of competitive advantage. Most work in the field has focused on answering the question, “Given a firm’s strategic situation, what actions should it take?” while overlooking the logically prior question, “What information should a firm collect to understand its strategic situation?” If firms do not collect the information they need to accurately assess their strategic situation, it is very unlikely that they will be able to make profit-maximizing strategic choices.

The question, then, is: how do organisations become aware and make sense of their environments to better understand their strategic situations? We can begin our answer to the question by stating the obvious: organisations as such cannot be aware of anything, although opinions to the contrary do exist (cf. Weick & Bougon, 2001; Calori et al., 1992). Awareness, like knowledge discussed above, is regarded here as purely a human quality that requires thought processes to emerge, and it is our contention that autonomous thought is something that organisations are clearly incapable of. It is held that sensemaking in organisations begins with the personal perspectives individuals use to interpret events around them. Terms that have been used to describe these personal perspectives include schemas (Cossette & Audet, 1992; Jelinek & Litterer, 1994), cognitive maps (Eden, 1992; Weick & Bougon, 2001), technological frames (Orlikowski & Gash, 1994), and mental models (Daniels et al., 1995). While awareness and sensemaking clearly are tied to the individual, one can muse over of a phenomenon of organisationally shared awareness – for want of a better term – resultant of human interaction and collective thought processes of the members of an organisation. Members of an organisation have a unique awareness of both the internal and external environment, and when these individually-held pieces of awareness are brought together within an organisation through interaction, what should ideally be the end result is a sum greater than its parts. The above point regarding organisationally shared awareness is in concord with personal construct theory (Kelly, 1955), arguing that individuals use their own personal constructs to comprehend and interpret events around them, and that these constructs are moderated by the individual’s experiences (Kelly, 1955, 1970). Thus, “[m]an looks at his world through transparent templates which he creates and then attempts to fit over the realities of which the world is composed” (Kelly, 1955, 8–9). Hence, according to Kelly, individuals come to understand the world in which they live by developing a personally organized system of interpretation based on their experiences (individuality corollary). The function of a personal construct system is to construe the current situation and to help foresee future events. Furthermore, in line with what is suggested above regarding organisationally shared awareness, Kelly suggests that individuals can share and appreciate to varying degrees the personal construct systems of others. His commonality corollary argues that the degree of similarity of psychological processes between two persons depends on the similarity of the construction of their personal experiences, and on the similarity in their conclusions about external events (ibid.). This is an important point regarding the attempt to develop a theory of managerial cognition and action in the forest industry context. Based on Kelly’s commonality corollary argument it may be argued that both the organizational and the industrial contexts constitute

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unifying frames of reference for managers in the field of forest industry paving way for a shared view of the basic premises of the industry. Central to organisationally shared awareness, and more specifically, to the shared awareness of the management of a company, is information regarding the state of an organisation’s environments. The response of an organisation to changes in its environments depends essentially on how the managers perceive their organisation’s environments. It has been established that managerial perception may differ greatly between, and even within, rival organisations facing apparently similar environments (e.g. Wilson, 1999). This idea seems feasible based on the analysis of the case companies above as well. While the companies analysed share the industry context in terms of goods manufactured, and thus have a unifying frame of reference, it would appear that the managements of the companies analysed must have had different perceptions of the set of opportunities available or threats facing them. The development paths of the companies have taken such varied routes that it merits taking a closer look at the issue of similarity of environmental context in terms of size, ownership structure and geography as is done in this volume. We may infer that there are several overlapping contexts within the industry that affect the managerial cognition of individuals in management positions of a given firm. Apart from the unifying industry context seen as a convergent force in the development of shared managerial cognition within the industry, there are contexts, such as the scale and scope of an organisation that may be seen to have a divergent effect on the development of managerial cognition. The scale and scope of an organisation arguably have an effect on how its management perceives the opportunity sets available for the organisation: whether it perceives its competitive environment to be local, regional or global as may be inferred from the case analyses in this volume (see Ahola; Lamberg a and Ojala; Ojala and Pajunen; Melander; Kreiser, in this volume). This point will be addressed in more detail below. It is further suggested that the effectiveness of an organisation’s strategic actions depends crucially on managerial perceptions, and that it may be more realistic to regard competitive strategy as a response to the perceived competitive threat, rather than a response to an opportunity – a perspective receiving considerably more emphasis in the strategy literature (Wilson, 1999; Porter, 1980, 1985). Consequently, information in different forms and from diverse sources occupies a central role in the development of managerial cognition regarding the state of various affairs both within and outside the organisation, and thus it forms the foundation on which action is based. The link between managerial cognition and action has been inferred from earlier studies of cognition in organisations (cf. Axelrod, 1976). A number of empirical studies provide support for this notion. For instance, linking managerial cognition and action, and cognition and performance (Thomas et al., 1993); arguing that the mental models of managers may be better predictors of organisational change than managerial characteristics, such as succession, age or education (Barr et al., 1992); and finding differences in the cognitions of owner-managers of successful businesses with those of businesses in demise (Laukkanen M, 1994).

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Cognition has traditionally been thought of as individually created and structured (Arnold & Nicholson, 1991; Shaw, 1980). However, cognition at the organisational and group level has attracted growing interest and has gained importance in strategic management research recently (Eden & Spender, 1998; Huff, 1990; Weick, 2001). Those taking either an organisational or group view on cognition suppose that it is possible to understand organisational cognition, and hence organisational action, by measuring and understanding individual cognition or personal constructs (Weick, 1995, 2001; Tan & Hunter, 2002). This approach has gained increased recognition mainly due to the growing acceptance off the idea that organisations possess cognitive capabilities – a view we would seriously call into question, however – and that these cognitive characteristics influence action (Weick & Bougon, 2001; Calori et al, 1992). It seems that organisations have often been assigned traits that strictly speaking belong to human beings alone as a matter of convenience. Terms such as organisational cognition (Walsh, 1995; Eden & Spender, 1998; Lant & Shapira, 2001), organisational awareness (Maybury et al., 2002), organisational knowledge (Nonaka, 1994; Pentland, 1995; Stenmark, 2001), learning (March, 1991), organisational sensemaking (Weick, 1995), and even organisational memory (Anand et al., 1998; Walsh & Ungson, 1991) are used as integral properties of organisations despite the fact that all of the above have mental processing in common, which, we feel, is beyond any organisation’s capacity. We would thus like the reader to bear in mind that although we may be referring to an organisation in what follows as the actor performing a certain deed in response to a certain event in its environment, or in order to initiate a certain event or series of events, it is the management of the company whose cognition and actions we are concerned with in this chapter. It is just a matter of convenience that we too resort to assigning an organisation an actor’s role although we have been somewhat critical of such practices above. Moreover, hereinafter we will mainly utilize the concepts of cognition and sensemaking when referring to attempts of organisation’s members, and more specifically, its managers to understand events both within and outside their organisations. Most often the preferred concept is cognition, as it is perceived to be the most inclusive of the terms. 3 MANIFESTATIONS OF MANAGERIAL COGNITION-CONDITIONING FACTORS WITHIN THE FOREST INDUSTRY IN FINLAND, SWEDEN AND THE USA In this section we discuss how certain factors affect (condition) managerial cognition, and more generally, sensemaking regarding the conditions faced by forest industry companies, and how they may be observed in the strategic conduct of forest industry companies in different national and ownership set-up contexts based on the case evidence presented in the volume. We will start by taking a closer look at how geographical location/geographical reach of companies may affect both sensemaking regarding the conditions faced by them, and the development of managerial cognition.

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The forest industry is generally regarded as a cyclical industry. The cycles of the industry are closely related to the levels of economic activity in the major economic regions of the world, Europe, North America, and Asia – the Triad. The level of economic activity in the Triad regions has traditionally set the tone for forest industry companies’ operations. In general, when economic activity is at high levels, turnover and profitability – backed up by rising prices of products – and all other economic indicators soar. When economic activity slows down, indicators plummet, as is evident especially from the case studies dealing with Finnish and Swedish forest industry companies (see Lamberg and Ojala; Ojala and Pajunen; Melander, in this volume). Sharp fluctuations in performance dictated by general economic trends have thus been historically an inescapable fundamental feature of the industry which the companies have had to live with. The general picture above is, of course, an oversimplification. There are differences between business lines with regard to their susceptibility and resilience to business cycles. As the case studies clearly demonstrate, companies have been well aware of the fact, and have acted accordingly. For all the companies analysed diversification, mostly related diversification, but also unrelated diversification was at one time or another an important conscious choice with the aim of smoothing out the sharp fluctuations in performance caused by swings in the business cycle. This choice was clearly in line with the received wisdom of the time. The results of earlier diversification are easily visible in the organisational compositions of the forest industry companies serving as our case examples. Another discernible trend, especially clear in the Swedish context relatively early on, is the attempt at smoothing out performance fluctuations caused by business cycles and spreading operational risk through international expansion of operations (see Melander, in this volume). For the Finnish companies analysed, international expansion played a notable role only considerably later (see Lamberg and Ojala; Ojala and Pajunen, in this volume) and may be seen as competitive threat-induced.1 While the driving force behind the international expansion of the Swedish companies, especially SCA, was the commonly held belief among the managements of the companies regarding a future raw material shortage in Sweden (see Melander, in this volume), the resultant international expansion within Europe was most likely seen by Finnish forest industry companies as a competitive threat which had to be dealt with. The logic behind attempts to reduce the effects of business cycles on performance through international expansion of operations has been that the cycles in different parts of the world would balance each other out. While this logic may have been accurate in the past (e.g. R Rugman, 1976), due to the globalisation of financial markets, it would appear, the logic has broken down. The business cycles of different regions of the Triad seem to follow each other with considerably less lag than previously. Thus, increased economic interconnectedness appears to have diminished the effectiveness of locating operations in different regions of the Triad in an attempt to smooth out the effects of business cycles on performance. 1

For a detailed analysis of the internationalisation development of the four largest Finnish forest industry companies, see Sajasalo, 1999, 2002a, 2002b, 2003.

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Consequently, instead of performance considerations, it seems that the international expansion of the Swedish companies was seen as strategic action that potentially threatened the vested status quo of the forest industry in Europe, and especially the long-established market positions of the Nordic producers in Central and Western Europe. Thus, establishing a presence in Continental Europe and Britain became a priority for Finnish companies also soon after their Swedish competitors had begun their international expansion. Such a motive for international expansion in oligopolistic industries has been suggested also by Vernon (1966). In addition to purely geographic considerations such as physical distance, the geographic location and the geographic reach of a company enter the picture as factors possibly affecting the sensemaking and managerial cognition in two other major ways: first, through national culture, and second, through organizational culture.2 It has been discovered in cultural studies t that, on average, members of a certain (typically national) culture portray distinct culturally conditioned traits related to information processing, and in consequence, to sensemaking and cognition (see e.g. Hofstede, 1980, 1991; Morden, 1999). More generally, it has been concluded that people of a certain nationality share a collective national character representing their collective cultural mental programming which shapes the values, attitudes, competences, behaviours, and perceptions of its members (Hofstede, 1980). While criticism has been raised against the use of nations (nation-states) as a means of distinguishing between cultures (Alexander & Seidman, 1990; McSweeney, 2002), nation-states and national cultures still remain the most convenient ways of distinguishing between groups of people in terms of their value orientation for purposes of analysis and discussion and thus will be utilized here also. The rationale for including culture as a factor in the discussion comes from the notion of the effects of globalization on business. The typical argument is that worldwide homogenous economic and technological rationales will lead to worldwide standardization of organizational structures and processes (e.g. Bartlett & Ghoshal, 1989). However, this view has been increasingly questioned because of its innate neglect of the fact that business organizations still differ remarkably from one country to another and between regions. It is argued here that both managerial cognition and resultant organisational behaviour are significantly shaped by national environments, and that the unified, globally harmonized and standardized organization is an oversimplified perception of a generally more complex reality (see e.g. Doremus et al., 1998; Ruigrok & Van Tulder, 1995, 152–169). A recent study concluded that national culture, national institutions and industry sector bear an important influence on work systems and organisation (Matten & Geppert, 2004). Figure 9.1 outlines some factors and their perceived relations to managerial cognition and sensemaking in addition to cultural factors. The role of information for managerial cognition in general terms has been discussed above, but its role for managerial cognition in the forest industry context will be returned to in detail later on in this part. The following discussion is 2

Although considerable debate exists over the essential nature of both national and organizational cultures, here this debate is overlooked as it is considered of minor importance for current purposes.

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organized around the factors/themes springing from the framework presented in Figure 9.1. G eography (N ational C ulture) Inform ation Sources C om m on to A ll

O rganizational actors

G eographical reach/ T ype of firm (O rg. culture) G lobal

T op M anagem ent

In-H ouse R egional

Proprietary

M anagerial Cognition

Sensem aking Regarding the External Conditions

L ocal

F unctional E xperts P ersonnel

Figure 9.1. Factors affecting managerial cognition and sensemaking of external conditions.

It is held that national culture, its surrogate here being geography,3 is an important background social institution that has an influence on both the types of organisations that emerge within a given national context (Whitley, 1992, 1994), and on the cognition and perception of the organizational actors which affect the organisation’s relations with its environments, albeit the influence may be difficult, if not impossible, to pinpoint with precision. The reasoning behind the above assertions regarding the profound impact of national culture comes from the fact that we all are “products” of a culture instilled into us early on and reinforced throughout our lives (Hofstede, 1980). As noted by Olie (1995, 127), “Common early childhood experiences in customs, education, language and religion are formative in determining the basic assumptions of a given culture.” Consequently, it is presumed that people cannot rid themselves of their culturally-bound influences and that this affects their being in various unsuspected d ways, including cognition, as culture forms the system of standards or rules for perceiving, believing, and acting that one needs to know in order to be part of a particular culture (Ouchi & Wilkins, 1985). Thus, it is safe to say that the cultural environment affects cognitive processes (Park & Gutchess, 2002). Although the national contexts of the forest industry companies analysed in this volume are different; five of them having their roots in the United States, six in Finland, and two in Sweden, the types of organizations that have emerged over time 3

We utilize geography as a surrogate here because, as noted above, geography a is characterized by politically agreed upon boundaries that demarcate the geographical areas of nation states. As nation states (or nations populating them) are seen to form m distinct areas characterized by a unifying culture (at least to some extent), we deem it appropriate to make the distinction between cultures in terms of geography.

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are not distinctly different. Even if development has resulted in the domination of large diversified multinational organisations as the dominant organisational form within the forest industry in the countries studied, the case evidence clearly shows that exceptions to the rule exist. The longevity of both Ahlström of Finland and that of Gulf States Paper of the USA – two family-controlled firms – demonstrate that there is no single best way within the industry (see Ojala and Pajunen; Kreiser, in this volume). It is not all about achieving a very large scale of operations as the two companies’ persevering success shows. Instead, it seems it is possible to manage in the exceedingly competitive forest industry with an appropriate size and welldefined scope as well. While, as stated d above, on the surfface it seems that the national culture or national context in general has not had an impact on the organizational forms that have emerged in the countries studied, there are more subtler impacts that emerge from the case analyses that may be considered as springing from national culture, in part at least. National culture is seen to play an important role in the development of the case companies and the industry in general especially in the cases of both Finland and Sweden. The cultural argument extends to the observed development in the USA as well, although the impacts of culture on the forest industry are different. Both Finland and Sweden, being small export-reliant nations on the periphery of Europe have developed into national business systems where both the state and financial groupings – the spheres – have played an important role in the development and steering of the national economies (see Lamberg and Ojala; Melander, in this volume; Näsi et al., 1998). The strong role of the state is by no means exclusive to Finland and Sweden alone, but the differences between the two countries in this respect provide an interesting and revealing contrast in terms of the relative importance of the industry, and the means employed by the two states to support their export industries. The role of spheres also makes an interesting comparison, both in terms of overall development of the industry in the two countries, and in terms of their effect on managerial cognition, as with the role of state. The attitude of both the Finnish and the Swedish state towards the forest industry may be characterized as allowing and ffacilitating. As discussed by Lamberg and Ojala, and Melander above, both the Finnish and Swedish states were willing to look the other way when it came to cartelisation within the industry. Cartels were the custom in both countries and they ranged from procurement to sales. This is in sharp contrast with conditions in the USA, which is a cartel-hostile environment: a feature which may be seen to reflect cultural influences also. While the importance of cartels for the forest industry companies differs in the two countries, their importance being less significant in Sweden, the role of sales cartels especially in Finland may be regarded as very important, if not crucial. It has been argued that without the long history and perseverance of sales cartels as a way of organising business relations between the small Finnish forest products companies and their customers abroad, the Finnish forest industry would not play as prominent a role globally as it does today (Sajasalo, 1999; Heikkinen, 2000). The allowing atmosphere may be seen to have had its effect on the mind-set of organisational actors within the industry. Arguably it played a role in the development of convergent managerial cognition in the two countries. The allowing

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atmosphere on the part of the state has manifested in the wide-ranging cooperation among competitors in both Finland and Sweden. Due to the close cooperation within the industry in both countries, and the relatively high esteem of the industry, the management of forest industry companies formed a group of management elite. The exchange of ideas between the members of this small management elite was facilitated by various forums, such as the Finnish Forest Industries Federation or the Swedish Forest Industries Federation. The continued exchange of ideas helped by indirect means the development of a shared worldview regarding the fundamentals of the industry, and even regarding the appropriate means of competition. In terms of appropriate means of competition, it is interesting to notice that attempts to “invade” the Nordic neighbour’s home territory were virtually nonexistent until the late 1980s when both United Paper Mills and Metsä-Serla performed acquisitions in Sweden. However, neither of the companies acquired belonged to the core business areas of the acquirer. In the late 1980s Swedish forest industry companies became active in Finland as well. The picture is much the same as with the Finnish acquisitions in Sweden, instead of belonging to the core businesses of the acquirer the acquisitions were more clearly unrelated diversification (see Melander; Lamberg and Ojala, in this volume). Whether this state of affairs was due to mutual understanding between the Nordic companies regarding the limits of competition or due to fear of retaliatory action sparked by an attempted invasion of the others’ home base remains an open and speculative question based on the case evidence in this volume and, as such, an interesting future research avenue to be explored. The facilitating attitude is most clearly reflected in the willingness of the two states to periodically boost the international competitiveness of a major export industry by means devaluing the national currency. It must be noted though, as pointed out by Melander above, that Swedish industrial policy was less attuned to serving the interests of the forest industry alone, unlike in Finland. The Finnish inclination to support the interests of the forest industry through devaluations becomes understandable by the fact that the share of total exports accounted for by forest industry products in Finland is some fifteen percentage points higher than in other major forest industry product exporters, Canada (the largest exporter), and Sweden (the fourth largest exporter) (Finnish Forest Industries Federation, 1999). The implication of the fact that the two states were willing to back up their major export industries through devaluations in the past is that it may very well have affected managerial cognition in both Finland and Sweden towards the adoption of a view that in the long run the key to success and survival is endurance: those that stood poor performance the longest would ultimately be the ones to reap the benefits of state intervention. Moreover, it may be argued that the traditional sphere structure – the ownership camps/clans of both the Finnish and Swedish economy discussed above (see Lamberg and Ojala; Melander, in this volume) have affected managerial cognition in similar ways as the facilitating attitude of the two states in the past. Especially in Finland the spheres played an active role in the restructuring processes within the forest industry over the years (Näsi et al., 1998, 2001) and offered a buffer for the companies in terms of financing prior to mid-1980s deregulation of the financial

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markets. The financial institutions around which the spheres were built served as the major creditors for the Finnish forest industry companies, and the mutually beneficial relationship – a relationship that may be characterized as marked by deepseated interdependency – created an arrangement which has been referred to as the era of patient capital (Lilja et al., 1992). Ownership of forest industry companies was considered a long-term strategic investment by the financial institutions and thus quick returns were not expected. This gave the management of the companies concerned considerable freedom to manoeuvre (Lilja et al., 1992). One of the most significant effects of patient capital, it may be argued, is the technological modernism of Finnish forest industry companies – they run the biggest, fastest, and technologically most advanced machinery in the industry globally. The geographical reach (type) of an organization/organizational culture may be seen to affect managerial cognition and sensemaking regarding the external conditions via various routes. It may be argued that the type of an organization clearly must have an affect on the type of environments encountered. As indicated in Figure 9.1, the type of an organization (firm) in terms off its geographical reach, it is suggested, may be classified into three groups of firms: the local, the regional and the global. Obviously to some extent it is a matter of judgement which group a firm is judged to fall into according to its attributes. However, using the geographical reach of organizations’ manufacturing operations as the deciding factor, classifying the forest industry companies analysed in this volume is a relatively straightforward and unequivocal process. Although considerable divergence in views exists regarding what constitutes a global firm (Stopford & Wells, 1972; Bartlett & Ghoshal, 1989), some claiming virtual non-existence of such an organisation (Rugman, 2003), we would nonetheless define a global firm in the context of the forest industry as one that is globally present in terms of its manufacturing operations, not necessarily on all continents, but at least in the Triad. Regional forest industry companies on the other hand have at best a continental focus of business, or otherwise a more restricted approach than the global firms. A regional forest industry company would typically be present in more than one country in its home region through production, but not in other continents, or only limitedly so. Local firms have geographically y the most limited scope: they operate in a one-country setting, and are basically domestic firms. While operating domestically, local forest industry companies may hold varied and numerous interests within the industry in a given country as our case evidence demonstrates (see Kreiser; Ojala and Pajunen, in this volume). This multiple interests per country feature applies to the regional and global companies as well. Local, regional and global companies are all represented among our case companies. Based on the criteria outlined above we can observe that a large share of the companies analysed would appear to be global in nature by the criteria used in the classification scheme. Three of the Finnish companies (UPM-Kymmene, Stora Enso, and Ahlström), one of the U.S. companies (International Paper), and one Swedish company (SCA) would meet the criteria for a global forest company utilized here in that they have production of their main products located in the Triad regions and they all have comprehensive sales networks spanning the globe. The group of regional companies in our analyses is equally represented in numbers. One

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company from both Finland (Metsäliitto/M-real) and Sweden (MoDo/Holmen), and three from the U.S. (Georgia-Pacific, Mead, and Weyerhaeuser) would meet the criteria outlined above in that the focus is clearly in the home region, with less emphasis on international production in other regions (mainly Europe). The group of local forest industry companies is smaller: of all the companies analysed, Gulf States Paper of the U.S. and Schauman of Finland would appear purely local in their orientation. Interestingly enough, the only surviving locally-oriented forest industry company in our sample is a family-controlled firm backed up by very large domestic market. The other locally-oriented company, Schauman, on the contrary did not manage to survive alone in the long run but merged with another Finnish company (see Ojala and Pajunen, in this volume). Thus it appears that Schauman was in a disadvantaged position in comparison to Gulf States Paper in terms of market conditions, which appear to have a crucial role for the possibilities of survival for small domestic family firms operating in the forest industry according to our case evidence. The managerial cognition-conditioning effect of the geographical reach of a company, as referred to in passing above, comes primarily from the different business environments encountered by the different kinds of companies. While the industry itself may be considered global, and by various criteria also some of the companies, the reality is that until recently the industry setting has been characterized by competition mostly within regions. While shipments between regions have increased somewhat over the years, they nevertheless play a minor role in the big picture. The largest flows of forest industry products stay within the region in which they were originally produced, while only a fraction of the total output ends up being consumed in a different region (Wardle & Michie, 1998). Thus the companies based either in Europe, North t America or Asia have competed mostly against other companies based in their home region, and inter-regional competition has played a lesser role. This situation, however, has been changing recently due to increased internationalisation of the leading companies within the industry. As our case evidence demonstrates, internationalisation within the industry has increased over the last twenty years (see especially Ahola; Lamberg and Ojala; Melander, in this volume), although it has had a significantly different role for the companies studied. As evidenced by the analysis of the Nordic forest industry companies and their North American counterparts, internationalisation has had a very different role for the companies based in these two areas. While internationalisation has played a crucial role for the Nordic companies as a means of securing their viability, internationalisation for the North American, especially U.S.-based, companies has played a much more minor role in terms of viability. The U.S.-based companies have had the advantage of the largest market for forest products at home and thus the role of international involvement could be characterized as an overflow valve in some senses for the U.S.-based companies. Internationalisation has at no point in time been a matter of life and death, and hence a strategic priority for U.S.-based companies, unlike for those in the Nordic area. This obviously has an effect on managerial cognition regarding both the perimeters of the playing field and the importance assigned to international

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expansion of operations as a growth strategy. It seems, based on our case evidence, that the Nordic forest industry companies perceived internationalisation earlier on as the only viable solution in the race to remain among the top companies within the industry, for obvious reasons. As the Nordic forest industry companies have been disadvantaged in terms of home market size in comparison to their U.S.-based counterparts, it has been a strategic necessity for them to look outside their home base quite early on, and outside their home region (continent) more recently. Thus it seems only logical that the managements of the Nordic companies developed a global mind-set (Gupta & Govindarajan, 2002; Bagley & Boyd, 2003) earlier than in the USA. Although we have no means of directly assessing the mind-sets of the managements of our case companies, the above assessment may be justified in the manifestations of managerial cognition, the strategic actions of the case companies, which would suggest that the Nordic companies portray more features of global mind-set-driven behaviour than the U.S.-based forest industry companies analysed. The role of information on managerial cognition may be perceived as quite closely related to the geographical reach of an organisation. It is held that the national context in terms of infrastructure and business climate – more so than in terms of national culture – has an effect on information sources, their availability, quality, and ease of access. While it may be argued that the leading forest industry companies may not significantly differ from one another in terms of in-house information acquisition capabilities, or access to outside information sources, the perception of the information may differ based on the type of organisation and the managerial cognition resulting from the mind-set of the management. The case analyses in this volume provide some evidence on the existence of this proposed information source and interpretation bias between different types of organisations. The strategic conduct of the Nordic forest industry companies in particular seems to offer some evidence within the industry to portray a tendency towards groupthink: major acquisitions as means of growth seemed to suddenly replace organic growth within the industry towards the end of the 20th century. This being predominantly a Nordic feature raises some questions regarding information asymmetry within the industry. What led the managements of the Nordic companies, most notably SCA, Stora Enso and UPM-Kymmene to pursue major acquisitive strategic moves in North America (the former two materialised, the latter did not) regardless of the fact that the North American forest industry companies were judged to be overvalued in terms of their stock price at the time? Obviously we can only speculate on the above question at this point due to the inability of our current data to provide an answer to it. It thus remains an intriguing open question calling for further examination and, as such, a future research avenue. Nevertheless, in line with our argument regarding the effect of industry context on managerial cognition, it would appear that there could very well be a convergent managerial cognition effect conditioning the actions of managers, and as a result, the strategic actions of the companies. In other words, regardless of the fact that we are unable to exhaustively answer the question related to the motivations of the managements of the three companies in question, we can, however, infer and notice in the strategic actions taken that somehow they came to the same conclusions regarding the necessity of entering the North American markett through the only

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option available – or at least what seemedd to be the commonly shared perception of the market situation – by means of acquisition. This would suggest to us that there were processes of convergent managerial cognition at work within our case companies. Historically speaking, events such as entry to North America by the Nordic companies in which a group of companies come to similar conclusions all at once are not exceptional within the forest industry. The industry has evidenced several rushes of investing in new capacity in products considered to offer faster growth than the industry average, or more recently in regions considered to offer better growth opportunities than the traditional bases of operation. Thus there seems to be, as suggested above, a strong tendency to portray groupthink within the industry. This may be due to characteristics of the industry, such as maturity, or the relatively long lead-time of investments that results in lumpy investments. In a mature industry such as the forest industry it may be less damaging to the established status quo to mimic the strategic actions of companies perceived as your closest rivals, which leads to a snowball effect. If a rival invests in new capacity in a product regarded as offering fast growth, a firm cannot risk being left behind but has to act accordingly. As this happens along the line, and because of the long lead-time, the new capacity comes online in a relatively short time period, the result of which is serious overcapacity. Hence it is the customers instead of the forest industry companies who reap the benefits as prices erode. While the industry has managed to show more disciplined investment behaviour recently than in the past, the companies are not – to utilize a fitting figure of speech – out of the woods in terms of the risk of groupthink when it comes to Asia, or more recently South America as an investment target. The projections of remarkably fast growth for forest product demand in the two regions are obviously attractive for companies seeking additional growth. This also poses the greatest threat: if, as in the past, the companies come to the same conclusions about Asia’s and South America’s importance – of which there are accumulating indications already – there is a great risk that the result will again be a global overcapacity in certain products and that the forest industry companies will end up worse off than they already are. What, then, is the force driving this groupthink phenomenon, or convergent managerial cognition tendency, within the industry? A key aspect influencing the tendency within the industry to portray convergent managerial cognition and, as a result, convergent strategic action, we would be ready to claim, is related to the information available. As has been repeatedly argued above, information has a critical role in the development of managerial cognition. More generally, information is the central building block, the input required by the mental process that constitutes the basis for our understanding of the world around us. As this is the case, it is only logical to assume that the available information – leaving differences in individual information processing habits and capabilities aside – has to have a profound impact on managerial cognition, or cognition per se. As discussed above, there is no reason to assume that forest industry companies are very different from one another in terms of their information acquisition capabilities or access to information. In ffact, the very opposite might be more

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accurate. As we have indicated in Figure 9.1, we see that industry-related information may be divided into three broad categories according to its origin: 1) information which is common (and available) to all, 2) information that is produced in-house, and is thus available to organisational members only, and 3) information that may be regarded as proprietary in nature. By proprietary information we mean information that is available for a fee from the party producing the information and controlling access to it. Information that is common and available to all would include various statistics and forecasts produced by public bodies, distributed either free of charge or for a marginal fee. Since this kind of information is available to all, it would be safe to assume that most forest industry companies’ management would be aware of its existence, and to some extent aware of its contents. Since information that is available to all and therefore may be seen as a public good basically offers no basis for discrimination between its recipients, it cannot serve as a source of competitive advantage. What this kind of all-inclusive information serves is most likely the formation of managerial cognition related to the basic premises of the industry in terms of global consumption trends, overall economic outlook for the industry, and other similar broadly defined understandings of future developments affecting the industry. It needs to be noted, though, that despite the commonly available information’s inability to serve as a basis for competitive advantage, it too, like any other kind of information, has the potential to serve as a source of competitive disadvantage if for some reason the information gets misinterpreted by many of its recipients. Proprietary information is typically produced d by consulting agencies catering for the information needs of the forest industry or by the finance community, most notably investment bankers. Although proprietary information differs from commonly available information in many respects, in terms of access it does not differ very much from it. Everyone within the industry with the necessary financial means at their disposal would, in principle at least, have equal opportunities to obtain the information produced by consulting agencies and other similar organisations. Commissioned information production projects are a different matter in certain respects and subject to client privileges over the information generated. However, in general, information production is the business that consultancies, investment bankers and other similar firms are engaged in, and it is in their interest to sell their valuable commodity to as many clients as they can. While, as noted, proprietary information has the potential to serve as a means of discriminating, or creating information asymmetries between rivals, the asymmetries created by proprietary information are likely to be relatively short-lived because of the business interests on the part of the producer of the information. In terms of the formation of managerial cognition proprietary information has likely a somewhat different function than information that is available to all. Most likely proprietary information serves managers’ more specific information needs and thus also serves the creation of managerial cognition in connection with more constricted fields of sensemaking regarding business conditions, such as likely opportunities and threats faced by the organisation.

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The type of information that has clearly the highest likelihood of producing longer term information asymmetries, and thus, the potential to serve as a source of sustainable competitive advantage is information that is produced in-house. Since the information is produced within the organisation it has the least transparency for organisational outsiders, and therefore it has the potential to discriminate between rivals. Judging the importance of in-house information from the vantage point of the resource-based view of the firm (Wernerfelt, 1984; Barney, 1986, 1991), it is clear that in-house information meets most of the criteria set for sustainable competitive advantage-creating resources in that in-house information may be considered valuable (increases organizational efficiency and/or effectiveness), rare (nonattainable for all), inimitable (non-standardized rules or procedures), and nonsubstitutable. While the non-substitutability requirement is somewhat open to discussion, it may be argued that because in-house information production is characterized by path dependence of the resource, causal ambiguity between the resource and competitive advantage and by the social complexity of the resource, information created in-house has great potential for supporting the achievement of sustainable competitive advantage as suggested by Barney (1986) and Dierickx and Cool (1991) for instance. While in-house information has the potential to support the creation and sustaining of competitive advantage, it would seem, judging from the historical development patterns of forest industry companies, that either the creation of inhouse information or its utilization in decision-making has had a minor role to play. It appears that the strategic actions taken by the leading forest industry companies have had striking similarity taken as a whole. This would point towards the domination of proprietary information and information available to all as sources, leading to convergent patterns of behaviour and organisational mimicry due to symmetrical information. Hence in principle everyone within the industry is faced with identical information, and operating on identical information, whether accurate or less accurate, leads to similar managerial cognition, conclusions, decisionmaking, and ultimately to similar organisational behaviour, that is, strategic action within groups of firms sharing contexts such as geographical reach or ownership setup as evidenced by the case analyses in this volume. 4 DISCUSSION AND CONCLUSION In this last section we will attempt to put together and discuss the components and central ideas of the suggested theory of managerial cognition and action in the forest industry context. Based on the case evidence presented in this volume there seems to be certain basic tendencies within the forest industry that may be seen as manifestations of forest industry-specific managerial cognition and managerial cognition-resultant strategic action. How this shared managerial cognition may have come about has been discussed above in some detail, and it is suggested that information, more specifically, its symmetricalness has a major role to play in what we find within the forest industry. Convergence of strategic action may be seen to result from convergence in managerial cognition within the industry. As management is seen as the central

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group in an organisation whose job it is to create strategies, and with the help of the organisation at their disposal to carry them out, it is quite clear that managerial cognition has an important effect on organisational action. While we focus on management here as the central actors defining the direction of an organisation, we do not wish to imply that sensemaking, strategy-making, and directing an organisation is a one-man show, nor is it a top management team show alone, but a group effort of all te organisational actors. We would like to illustrate our point of view with Figure 9.2 and use it as a vehicle for further discussion regarding some central issues in the construction of a theory of managerial cognition and action in the forest industry context. Inform ation Sources C om m on to A ll

O rganisational actors T op M anagem ent

In-H ouse P roprietary

M anagerial C ognition

Sensem aking R egarding the E xternal C onditions

F unctional E xperts P ersonnel

Figure 9.2. Parties involved in the overall organisational sensemaking process.

We would like to return to a theme that seems to recur throughout our discussion of managerial cognition: the importance of information for managerial cognition and, more generally, for sensemaking in organisations. As information is considered the raw material of managerial work and knowledge, and informational roles to be at the very centre of managerial work (Auster & Choo, 1994; Mintzberg, 1973), we feel a further elaborative discussion on the importance of information and knowledge production within organisations and on the relation of information and knowledge to the formation of managerial cognition within the forest industry is merited. By placing managerial cognition and sensemaking regarding the external conditions centre stage in Figure 9.2, we wish to stress that the processes involved in coming up with an organisationally shared view of the purpose of an organisation and the ways it relates with its surroundings need input from various members of the organisation. A central role in the sensemaking process for any organisation in addition to its top management, and in the case of forest industry companies in particular, we would argue, lies with the members of the organisation representing its boundary spanning functions. This is because members representing, for example, such boundary spanning functions as sales and marketing, R&D, and investor relations come into direct contact with information that may be

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characterised as being non-public through their daily activities: information that is highly relational and thus not easily accessible for organisational outsiders (Dollinger, 1984). This kind of information has the highest potential for creating information asymmetries among otherwise well-informed companies in industries characterised by a small group of equally resourced competitors, case in point the forest industry. It would appear, based on the case evidence and analysis presented above, that traditionally, until recent years at any rate, the major change processes within the industry have had their origins for the most part in the U.S.-based forest industry, and the effects of actions taken by the leading U.S. forest industry companies have had their repercussions within the industry elsewhere with some lag. We can observe behaviour among our case companies that fits the above assertion. For one we may recognize this kind of pattern of reacting to competitive threat created by changes in the industry structure in the 1970s and 1980s caused by the energy crisis. While the increased costt of energy affected everyone within the industry, its effects turned into strategic action only after the U.S.-based forest industry began consolidating. The actions spread first to Sweden in the 1970s, and later on to Finland in the 1980s, as the managements of both forest industry companies and the traditional financial spheres in the two countries awakened to the competitive threat posed by the scale-hike of U.S.-based forest industry companies (see Ahola; Lamberg and Ojala; Melander, in this volume). In other words there is a discernible trend within the industry to “follow the leader”, while this trend is, seemingly at least, breaking as the Nordic industry challengers have caught up in recent years with their American counterparts. What we find within the forest industry context in this respect is not new, nor is it a forest industry-related phenomenon alone. As, for instance, DiMaggio and Powell (1983, 152) have noted, “[o]rganizations tend to model themselves after similar organizations in their field that they perceive to be more legitimate or successful.” Whether the leader – follower setting is changing, or already has changed remains an open question based on the data used in this volume. Some tentative claims of such a shift have been presented in unofficial accounts by industry experts, however. There would appear to be certain additional compelling features within the industry that would justify the claim of there being some forest industry-specific patterns of thought and action. Thus, we would be ready to argue that it is possible to construct a tentative theory or, if not a full-blown theory, at least a model of managerial cognition and action in the forest industry context. The model is an attempt to outline the logical priors to the observed convergence of strategic action we find through the case analyses in this volume. We utilize Figure 9.3 to illustrate the model and the components we feel are the most important in explaining the observed convergence of action within the group of leading forest industry companies. In understanding the tendency towards convergent action within the global forest industry, we feel, there are three groups of influences thatt are particularly important for both understanding and explaining the phenomenon. First and foremost, the underlying features of the industry have an important role to play. Second, there are some important cultural influences, and third, the formation of managerial cognition

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clearly must have an effect on the strategic actions taken by companies. While the groups of influences outlined above are important in themselves, the interplay between them is the most important matter when trying to understand the convergence of strategic action we find within the global forest industry.

Cultural influences

Fundamentals of the global forest industry

Managerial cognition

Convergent action within the global forest industry

Figure 9.3. Model of managerial cognition and action within the forest industry.

The fundamentals of the industry have to do with certain basic features associated with the global forest industry that define the perimeters and conditions of the playing field for companies. Some of the features associated with the industry are: low growth in most product areas, production and technology-centred orientation of the companies (especially in the Nordic Countries), heavy emphasis placed on market share and safeguarding the same, established and deeply anchored positions of the incumbents of the industry in the traditional forest industry regions (North America, Continental Europe, Nordic Countries), high barriers for entry and exit and, in practical terms, the very local nature of operations. The importance of these industry fundamentals – or more precisely, features perceived as such by most that are actively involved with the industry – is that they form a commonly shared received worldview regarding, for instance, what is considered feasible, attainable, proper, or otherwise the basic rules of the game within the industry. This process of coming to share a common worldview is obviously linked to managerial cognition influenced by the information the management either directly acquires or that results from the collective sensemaking within a given company. This is where the cultural influences step in. While it is held that culture plays its role in various phenomena around organisations and how their members conduct themselves (Matten & Geppert, 2004; Lane, 1992; Sorge, 1995; Whitley, 1992), and although it may be impossible to pinpoint how, we would be ready to argue that the vested ways of the industry – forest industry culture – influence the managerial cognition in various subtle ways. As the shared worldview regarding the received industry fundamentals becomes established through various means of social interaction, the shared industry fundamentals appear as given to those within the industry, in the short term at least. In the longer term, however, the industry fundamentals are subject to change as new information regarding developments within the industry, resulting from both the strategic actions taken by the players within the industry and changes in global

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economic circumstances becomes widely known within the industry, and thus affects managerial cognition regarding prevailing industry conditions. We therefore do not assume the prevailing state of convergent strategic action that we can observe to be a steady and fixed state of the industry. Instead, we would be ready to posit that, in all likelihood, the change in the state of affairs within the global forest industry will take place in the future through change having a paradigm change character. As there seems to be a tendency within the industry to stick with present practice if performance exceeds aspirations, it would be reasonable to assume that future “outbreaks” from the current modes of operation by certain companies generally considered successful within the industry by their peers will lead, after a period of resistance and ‘sticking to their knitting’ by the others, to imitation and therefore to the adoption of a new mode of operation – the next generation of received industry fundamentals. The conclusion above coincides with findings and propositions found in the works on organisational decision-making, innovation and organisational information processing. For instance, in the innovation literature managers are often assumed to be unable to assess innovations from first principles, and are seen as seeking to learn from the coincidence of innovative strategies and subsequent outcomes. Thus, the realised failure of one’s own blueprint in comparison to others’ stimulates the search for an alternative and results in a wave-like change within the industry.4 For the time being, however, as both the information and the worldview regarding industry fundamentals are very similar among the group of leading companies within the industry, it is hardly surprising that the end result of this interplay between the various elements in our model is – as we can observe through the case evidence presented in this volume – convergent strategic action.

4

For a recent discussion of such wave-like change in the adopted mode of operation, see Sajasalo, 2003, which takes a closer look at the evolution of the internationalisation strategy of the leading Finnish forest industry companies where a similar pattern of development was discovered.

CHAPTER 10

CONSOLIDATION BY GAME-PLAYING: A GAMESMANSHIP INQUIRY INTO FORESTRY INDUSTRY JUHA NÄSI Tampere University of Technology e-mail: [email protected]

PASI SAJASALO University of Jyväskylä e-mail: [email protected]

1 INTRODUCTION If one takes a flight in Finland from the country’s capital, Helsinki, for instance, north to Rovaniemi, the ‘Gateway to Lapland’, the scenery below consists typically of lakes, rivers and marshland, but most of all of forests. Wood in all its forms has been for centuries the core of the national character as well as the locomotive of business in Finland. Over the years the Finns have come to understand that the forest sector is perhaps the strongest guarantor of the Finnish economy and identity. The old saying ‘Finland earns its living from its forests’ can even be interpreted to mean ‘what is good for the forest sector is good for Finland’. Lilja, Tainio and Räsänen (1991a) encapsulated the historical essence of the Finnish forest sector by terming it a very special business system. This system was an entity composed of four principal characteristics. Firstly, the national economy was highly dependent on the export revenues from the forest industry. Secondly, there existed a high concentration of forest industry communities where the living standards of the working class were higher than in surrounding communities. Thirdly, there prevailed a symbiosis between bank groups and forest companies. Fourthly, the technological sophistication of the production and distribution networks was outstanding.

225 Juha-Antti Lamberg, Juha Näsi, Jari Ojala, and Pasi Sajasalo (eds.), The Evolution of Competitive Strategies in Global Forestry t Industries: Comparative Perspectives, 225–256. © 2006 Springer. Printed in the Netherlands.

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Three comments will serve to illuminate this picture. First of all, the system, especially with regard to finance, used to operate in a regulated and almost closed setting. The banks had a predominant role and the opportunities for foreign ownership were very restricted. Second, the strategic activity in the top one hundred largest companies was based on sphere governance. The spheres were bank-related groupings of firms interconnected with ownership ties. In 1980 there were still six spheres of this kind operating in Finland. The spheres competed with each other for power and status in national business life, each ‘owning’ forestt companies, even flagship ones. Finally, in spite of the combative overall atmosphere, there was a lot of calculated co-operation between key forest companies from different spheres (see Ojala and Lamberg, in this volume). For instance, they established and ran together joint sales associations for decades. It is safe to assume that cartels were not rare in those days. Some twenty years ago cracks appeared d in this fine-tuned mechanism and its collapse ensued. We may divide this development into two major stages, the first taking place from around 1985 to 1995 and the second from that year to the present. The first stage was a period of real turmoil; it could even be called a pre-capitalistic period with the spheres actively plotting against each other. The second, then, could be characterized as a time of capitalism and open markets with real competition. In this chapter our aim is to concentrate on the first period of development, that is on the time when everything started to change radically. The deregulation of banking, the sliding of the country into a major depression, the liberalization of foreign ownership and the ‘opening of doors’ when Finland joined the European Union: all these accelerated and intensified the changes taking place within the Finnish forest sector and its sphere governance. This chapter, then, serves as an example of intense period of competitive rivalry rather atypical for the pulp and paper industry over the whole period covered in this volume. This chapter further goes to show as discussed by Lamberg and Ojala in their introduction to this volume that competitive rivalry within the industry has to a very large extent been either regionally or even domestically motivated. In this chapter the strategic reality and the descriptions that go with it are analysed by utilizing the metaphor of the game: the strategic action of individual companies is perceived as gamesmanship activity involving players, moves, arenas, rivalry and co-operation. We believe that the process of concentration in the forest sector happened as a consequence of moves made by players in a limited game arena. The key players in this game were the spheres (company groupings), which were always striving for growth and increased influence, the forest industry companies themselves, and, of course, the individuals who wielded power in these companies and spheres. As to our priorities, the empirical reality comes first: we want to perceive what happened in the field. The conceptual framework we present serves mainly as an instrument enabling us to see our subject more clearly. Thus the empirical goal of this chapter is to outline and interpret the process of radical change in the Finnish forest industry over a certain period of time and to make the course of events more comprehensible with the help of the gamesmanship framework. The theoretical aim is to demonstrate that the gamesmanship perspective can provide serviceable concepts and a frame of reference for the analysis and

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understanding of strategic events and developments. Overall, then, we underscore the idea of understanding the actions of intentional human beings, and we are not looking for causal explanations in this particular context (see von Wright 1971). We follow the basic ideology of case study research (Yin 1994), but adding some special flavours. Our approach relies on the use of qualitative methodology (see Tesch 1990), concentrating on the description and analysis of the change process in an industry. An interpretive perspective occupies a central position in our approach. The description of the four spheres’ developments leans heavily on the annual reports of their member companies. They provide official and audited reports produced by the companies of their activities, and thus a documented historical record of events in the firms under study. The use of annual reports as a valuable source of data for strategy research purposes in the forest industry context has been advocated by Sierilä (1989, 1991), who, based on his studies utilizing annual reports, concludes that they are a useful source of data, yet one that has been needlessly neglected by strategy researchers. The annual report data is supplemented by data drawn variously from business papers and magazines, which gave intensive coverage of many developments within the industry, news releases and extant literature commenting on the evolution of the forest sector. Taken together, these sources offer an additional reference point against which the accuracy of the data based on the annual reports may be tested (e.g. Jick, 1979; McGrath, 1982; Denzin, 1978, 1989). Hence they offer an important means of increasing the validity, reliability and credibility of the research findings. The chapter is structured as follows. After a brief empirical synthesis, we seek to show with a short review of the literature that the concept of strategy and the idea of the game and playing can be successfully y combined with each other. We then proceed to outline three conceptual frameworks that facilitate the analysis of the gamesmanship activity with which we are concerned in this chapter. The following section will be the core of our chapter. It presents a description and interpretation of the development processes. A comparative synthesis of the strategies realized by the flagship companies of the four spheres together with a speculative discussion will conclude the chapter. 2 THE FINNISH FOREST SECTOR GAME IN ITS ENTIRETY Finland has not been called ‘Finland Limited’ in vain, so much have Finnish corporate structures resembled the dominant company networks in Japan. Such networks in Finland have been called spheres or blocs (for spheres see Virta 1989; Business Finland 1990; Gordon 1990; Lantto 1990; Jorgensen & Näsi 1994; Näsi, Näsi & Savage 1996). Here the term sphere is used for them. By spheres we refer to a network of related firms connected by ownership ties and more or less controlled by some core firm or firms within the network. Each sphere in Finland has contained dozens of companies. Almost all large corporations (and all the major forest corporations) in Finland have belonged to one sphere or another. Within the spheres the power and influence of the different member companies and their representatives have varied over the years. Typically there existed just one

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or only a few power centres that controlled the major moves within the sphere, that also took the megastrategic decisions in the member companies and that had the authority to shape and reshape the sphere itself. These power centres consisted of only a few key individuals (on the role of key individuals see Lamberg; Ojala and Lamberg, in this volume). As a rule these individuals were kept informed about and took part in the governance of member companies through seats on boards of directors and – something characteristic of Finnish corporate life – supervisory (advisory) boards. Every now and then, at critical moments, these key people took the lead as individuals and redirected the whole sphere and the companies of which it was comprised. This was especially true in the numerous instances of mergers and acquisitions. Seen against the background briefly sketched above, it is only natural that the power struggle between the spheres was reflected in events within the Finnish forest industry. In 1985, at the start of the period under analysis, there were still four large spheres, and at the end, in 1995, three remained. The shared history of the spheres and the forest industry has been filled with conflict and drama. On the one hand, the spheres have fought bitterly with each other for power. On the other hand, the spheres have been capable of extensive cooperation with each other, especially at the two ends of the production chain. Even the fiercest of competitors have owned jointly pulpmills. Also, marketing of all Finnish forest products was to a very large extent handled for decades through jointly owned sales associations established by the forest corporations (see e.g. Heikkinen 2000; Sajasalo 1999). In 1985, it was quite easy to name over a dozen Finnish firms that operated in the forest sector. Some of these were multibusiness corporations and some were familyowned companies either completely outside any of the spheres or else only loosely connected to one. Overr the next ten or more years, however, all of them became involved in the forest industry game being played out between the four major spheres in the Finnish economy. In the period under discussion this group of initially relatively small-scale forest industry companies shaped itself into three world-class corporations. Finally, by the mid 1990s, these three corporations ranked among the seven largest companies in Europe and among the thirteen largest companies in the world in their industry. (Sajasalo, 2001. p. 114, Figure 35) 3 GAME AND PLAY APPROACHES IN BUSINESS AND STRATEGIC THOUGHT There is nothing new in speaking or thinking about business, strategy, games and playing together. To do so is in fact rather commonplace. 3.1 Game Theory and Game Philosophy As far as explicit theories concerning game activity in the strategic context are concerned, the most extensive and important contribution is, of course, the field called game theory, which is ideal in its clarity (see von Neumann & Morgernstern

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1944; Kreps, 1995; Schelling 1978 and 1995; Shapiro 1989). In this theory games proceed with moves and players with choices. The players are considered inherently rational in their dealings. They only have a few strategies to choose from, and these strategies can result in only a few predictable outcomes. Most of the rules are known to the players, and the commonest basic objective of a player is to optimize something. At the other extreme of the conceptual strategic game continuum is game philosophy. This philosophical treatise on the human mind concludes that the wisdom of ages has been packed into our genetic code, offering individuals unique opportunities in the game of life (see, for instance, von Hertzen 1993). In game philosophy thinking, consciousness and language are some of the most important prerequisites for the human being, a clever survival artist who is directed by innate rules that programme him or her to form groups and operate in them. This activity can be seen as game-playing taking place in numerous different games. For instance, the ‘Culture Game’, includes individuals and their values, societies and their customs, as well as ideologies and order. The ‘Economic Game’ is crucial. The struggle for survival is, in essence, naked economic competition. The ‘Market Economy Game’ now commands our era of history. Thus today the human being is a game person, playing all the time. 3.2 Implicit and Explicit Game and Play Perspectives In the current strategy literature there is no shortage of presentations of games and playing. For example, approaches like ‘cognitive modelling’, ‘portfolio management’, ‘positioning theory’ or ‘choice matrices’, all contain items or ideas relating to games and playing, even if game-playing language is only seldom used. This kind of implicit reference is typical even for classic names, such as Michael Porter and Henry Mintzberg. Michael Porter’s works (1980, 1985, 1990) can be readily interpreted as manifestations of game-playing ideology. For instance, Porter’s ‘firms’ can be taken as referring to players, ‘the field of competition’ and ‘industry’ to game arenas, ‘generic strategies’ to move selection, ‘competitive advantage’ and ‘value chain’ to instruments for choosing the right moves. His ‘home base’ and ‘diamond’ concepts, of course, refer even more directly to game-playing phenomena. Henry Mintzberg’s classification of generic strategies, set out in a response (1988) to his rival Porter, can readily be interpreted as a game-playing repertoire. His basic categories are locating, distinguishing, elaborating and extending the core business, and reconceiving the business. All these activities can be interpreted as moves. Furthermore, they are divided into 16 sub-categories (sub-moves), which are then chopped up into 44 sub-subcategories (sub-submoves). Nowadays we, however, can find comprehensive frameworks with explicit game language (Ghemawat 1997, Brandenburger & Nalebuff 1996). Let us take Brandenburger and Nalebuff (1996) as an articulated example of game-playing theory. Their game means not only competition activity but also competition and cooperation together, to which they give the label ‘co-opetition’. Their framework is called PARTS. ‘Players’ are the participants of the game, ‘Added Values’ refer to

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the values participants bring to the game, ‘Rules’ mean the regulations which govern how the game is played, ‘Tactics’ represent the moves players can make and ‘Scope’ defines the boundaries of the game. To change the game, which often is very advantageous, one needs to change one or two elements in PARTS. An important notion for this framework is the nature of the player; he or she can of course be your competitor, but is often your supplier, customer or complementor, too. 3.3 Politicking There is another broad stream of game and playing thought, one which sees organizational behaviour as ‘political games’ or ‘politicking’. This large sect may be divided into micro and macro perspectives (Mintzberg, Ahlstrand, Lampel (1998), people, organizational and societal levels (Mitroff and Pauchant 1990), or simply into internal and external games. In politicking the key phenomenon is power, both financial and mental. Conflict resolution, negotiation, the application of force, manoeuvring and alliances represent some of the dialect’s key concepts. An illuminating example of the macro perspective is presented by Wheeler and Sillanpää (1997). It is the idea of free enterprise, which sets the rules of the game. The referees and linesmen enforce the rules. The teams are companies and corporations. Investors and bankers are the sponsors. Business leaders and CEOs are the team captains, while employees and customers are the supporters. Finally there is the playing field: an environment that must somehow be protected. Their stakeholder theory is a game-playing theory. From the micro perspective there is no shortage of evidence for game-playing, even dressed in explicit language. Mintzberg (1989), for example, is able to identify thirteen different political games in organizations. A short selection from Mintzberg’s list is very revealing of the nature of the whole approach: ‘Insurgency Game’, ‘Empire-building Game’, ‘Whistle-blowing Game’, and ‘Young Turks Game’. A very similar form of politicking can be found in Mitroff and Pauchant (1990): ‘Me Before Anyone’, ‘Buffering’, ‘Razor’s Edge’ and ‘Apathy’ are examples taken from a range of 21 games. The politicking approach involves a great deal of conscious cleverness, and often a great deal of out-and-out plotting where moves and counter-moves come one after the other. 3.4 Conclusions The ideas and elements of games and playing are not rare in the context of business and strategy thinking. Game theory and game philosophy represent different ends of the game continuum, the first in its obvious clarity and the second in its extreme comprehensiveness. Implicit and explicit game perspectives as well as the politicking view of business can be placed somewhere in the middle of this continuum. Soon we will see where our approach can be located in relation to the approaches just described.

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4 THE STRATEGIC GAMESMANSHIP APPROACH Our construct, the strategic gamesmanship approach, includes five important concepts. The first key word is a part of the second word, ‘man’ and refers to the mental nature of the players or the human beings, with all their activities and all their limitations. Our person or team is intentional, though often dangerously unaware of the real situation, provided with bounded rationality and subject to an assortment of feelings. The other crucial elements of the approach are the concepts of strategy, players, arena, game and playing (game-playing). By strategy we refer to the plot of the action or the common thread of an organization (Näsi 1986, 1987). Whatever is strategic is vitally important to an organization. The players, then, in the game are typically firms or their units. In this chapter they are spheres, companies and their dominant individuals. These players do something in an arena, which in our case is easily identifiable and limited: the forest sector in Finland within a specified period. What about ‘game-playing’? Game-playing means action. Action takes place through collectives and individuals. ‘Action’ here refers to intentional deeds, that is activity for which there is a purpose or goal. This action is seen teleologically, meaning that action is seen to be a consequence of how individuals view their situation, their goals and the possible means to attain those goals. Sometimes this strategic action may be carefully planned, at other times, though, it can be unconscious and intuitive. In this study we have used three frames of reference in order to categorize moves – deeds by nature as they will be realized strategy patterns in the following. The first frame focuses on the object of the game. The object of the game may be any stage in the production chain: raw materials or timber purchasing, semimanufactures such as pulp or sawn timber, finished products such as paper, paperboard or plywood products, and the marketing of all of these. This first interpretive frame of reference is depicted in the Figure 10.1. PRODUCTION CH AIN RAW M ATERIAL WOOD PROCUREMENT

SEM I-FINISHED PRODUCTS PULP , SAW N TIMBER, ETC

PRODUCTS PAPER, PAPERBOARD, PLYW OOD, ETC

SAL E S & MARKETIN G SALES ASSOCIATIONS

Figure 10.1. The first frame of reference: the objects of the game.

The second framework refers to the internal and external dimensions of the spheres. The game-playing activity of a given sphere can be of intrasphere type when it carries out internal development within the confines of the sphere, or intersphere when relations between spheres are moulded. Whether the game activity takes place in the intrasphere or intersphere setting, the moves performed by the parties involved may be interpreted to have human attributes. The atmosphere surrounding

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a move is characterized as either combative or amicable according to the interpretation of the nature of a given game episode. An episode is deemed combative if it is clearly characterized by y struggle over the object of the game. Correspondingly, an episode is deemed amicable if no evident competition over the object is reported in the data sources, or the episode is characterized by cooperation between the parties involved. When combined, these two dichotomies furnish our second frame of reference as shown in Figure 10.2. ARENA

COM BATIVE

INTRASPHERE

INTERSPH ERE

INTERNAL, TENSE

EXTERNAL, TENSE

INTERNAL, PEACEFUL

EXTERNAL, PEACEFUL

CHARACTERISTICS OF THE EPISODE

AMICABLE

Figure 10.2. The second frame of reference: the arena and the nature of the game.

How the spheres or companies proceed in the game arena when it comes to increasing or decreasing the scope of their activities or dealing with competitors is shown by frame number 3. Basically, the moves performed can be opening or expansive, as when starting some new endeavour or increasing efforts. Otherwise moves may be interpreted as closing or withdrawal moves, as when reducing or terminating some existing arrangement or venture. In both categories of moves we can classify three ways to handle competitors. First, there are company deals: it is possible that a factory, a unit or even a company as a whole can be acquired or sold. Second, there are the alternatives of combining or otherwise breaking up companies, which means that companies can be merged or a merger unpicked. Third, there are cooperative alternatives, where companies can embark on an alliance or else terminate it. These three categories of moves constitute our third frame as outlined in Figure 10.3.

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TYPE OF MOVE OPENING/EXPANSIVE MOVE

COMPA P NY D ALS DE

WAY OF MEETI TING THE COMPETIT I ORS

COMBININ I G COMPAN ANIES

COOPERATION

ACQUISITION OF A COMPANY/ UNIT

MERGER

ALLIANCE

CLOSING/WITHDRAWAL MOVE SALE OF A COMPANY/ UNIT

BREAKING UP A COMPANY

DISMANTLE OF AN ALLIANCE

Figure 10.3. The third frame of reference: ways of meeting competition.

Notes on the Gamesmanship Approach The origins of the gamesmanship approach are traceable to the works of Näsi (1986, 1987, 1991, 1994, 1996, 1999), in which he first presents the potential of the gamea stage within the playing view, then demonstrates that it is a clearly distinguishable development of strategic thinking (Näsi 1991), before going on to develop the analytical frameworks more fully (Näsi 1994, 1996, 1999) into the form they appear in, for instance, Näsi, Sajasalo and Sierilä (1998). For an example of the comprehensive utilization of the frames of reference in a comparative single-country setting see Näsi, Lamberg, Ojala & Sajasalo (2001), where the development of the Finnish forest industry companies over the 20th century is analysed. How do our frames relate to mainstream existing schools of thought? Our first framework contains ideas related to value chain literature (in particular Porter 1980, 1985) and traditional downstream-upstream thinking (Galbraith & Kazanjian 1987). The second framework has to do with politicking (Mintzberg 1989; Mitroff & Pauchant 1990), and the third with the portfolio management literature (e.g. Henderson 1984; Buzzell & Gale 1987; Hamermesh 1986 among others) and diversification literature (e.g. Wrigley 1970; Rumelt 1974, 1982, 1986; Salter & Weinhold 1979; Abell 1980; Galbraith & Kazanjian n 1986). As to the gamesmanship approach, we can locate it in the middle between game theory and game philosophy, where it clearly overlaps with the implicit and explicit game-playing approaches as well as with politicking thinking.

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5 EMPIRICAL ANALYSES OF THE FOUR SPHERES With our set of five key elements and the three frameworks we will now try to reveal the consistencies in the strategic gamesmanship models of the organizations being studied. We will now turn to the practical developments and track the major chains of moves sphere by sphere (for a more detailed description of the analysed companies’ development see Lamberg; Ojala and Lamberg, in this volume). 5.1 The Unitas Sphere This was the oldest grouping. Built around the Union Bank of Finland (UBF), it was originally established by members of Finland’s Swedish-speaking minority. The UBF, along with some insurance companies (Teva Group) and the Ehrnrooth family, formed the core of the sphere. The Union Bank of Finland was owned the by the Unitas Group, which gave its name to the sphere as a whole. The major companies regarded as belonging to the Unitas Sphere were Fiskars, Lohja, Wärtsilä, and Partek. Its forest sector flagship in 1985 was Kymi-Strömberg. The Unitas Sphere may be regarded as the initiator in the restructuring of the whole Finnish forest industry sector overr the decade to follow. The key individuals of the sphere were the president of the Union Bank of Finland, Mr. Mika Tiivola, and Mr. Casimir Ehrnrooth, a representative of an old, industry-owning Finnish family. It was these two who started and orchestrated the construction of the sphere’s forest flagship outlined in Figure 10.5.

Figure 10.4. The formation process of Unitas Sphere’s flagship Kymmene.

In 1985 the flagship, Kymi-Strömberg, was a multibusiness company. The process of change got under way when the decision was taken in 1985 to merge KymiStrömberg with Kaukas, which was owned by the Ehrnrooth family (1). The merger of Kymi-Strömberg and Kaukas took place in an intrasphere, amicable setting and

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was an opening move that involved semi-finished products (pulp) as well as finished products (paper). That same year the Union Bank of Finland (UBF) together with Kaukas acquired almost half of the share capital of Schauman, a family-controlled company that had been only loosely connected to the Unitas Sphere. Now, after competitive bidding, in which also the KOP–Pohjola Sphere participated, Schauman stayed under the control off the Unitas Sphere (2). This episode was in the end mainly of an amicable, intrasphere nature, although it did involve some intersphere action. The episode was the opening move towards deeper cooperation and involved semi-finished products (pulp, sawn timber), and finished products (plywood). The family-owned firm Serlachius, which was also only loosely connected to the sphere, merged with Metsäliiton Teollisuus, the flagship of the Agricapital Sphere, in 1986 and thus a new company Metsä-Serla was born. The birth of Metsä-Serla was surrounded by great secrecy and it came as a big surprise for everyone, including the Unitas Sphere (3). This was a surprising game-playing episode that took place in semi-intrasphere, semi-intersphere setting, and was neither characterizable as clearly combative nor amicable, since the Unitas Sphere did not have time to react to the Agricapital Sphere’s opening move. The same year KymiStrömberg, having decided to concentrate on its forest industry operations, sold most of Strömberg’s business operations, mainly electrical engineering, to the Swedish company Asea (4). This was a withdrawal move of intrasphere nature. In 1987 the company comprising Kymi, Kaukas and Schauman adopted the new name of Kymmene. That same year Schauman was merged with Kymmene (5), after which it seemed as if the internal development of the sphere’s forest operations had been completed. This episode was of a purely intrasphere nature and concerned both semi-finished products (pulp, sawn timber) and finished products (plywood). In 1990 the sphere’s Schauman Wood (a part of the Kymmene Group) acquired the chipboard and plywood operations of Enso-Gutzeit, the State Sphere’s flagship (6). This event took place in an intersphere, amicable setting and involved finished products. It was an opening move by the Unitas Sphere towards the State Sphere. The same year Kymmene withdrew from Finnpap, the joint sales organization of the Finnish papermills, and began to take care of the marketing of its products by itself (7). This move was a dismantling move which ended a very long alliance, and was of an intersphere nature involving the sales and marketing of the products. Four years later the surprising news concerning Kymmene’s and Repola’s merger negotiations leaked out. The news was unexpected because Repola (and United Paper Mills – UPM – as a part of Repola) was an integral part of the KOP–Pohjola sphere. However, the negotiations bore no fruit (8). This was just a first, tentative attempt and it took place in an intersphere setting. It was an opening move towards a future merger. When UBF and KOP merged in 1995 (9), the final merger of Repola (of which UPM was a part) and Kymmene was seen merely as a matter of time. The merger was finalized in the autumn of 1995 and UPM-Kymmene was born (10). The merger of UBF and KOP Bank to form the new Merita Bank has been held to be the merger of the century in Finnish corporate life, f because it was previously considered an impossibility. It took place in an intersphere setting and thus ended the division between the Unitas Sphere and the KOP–Pohjola Sphere. The merger of Repola and Kymmene was of both an intersphere and intrasphere nature and it was

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also rather combative since there were some interest groups that still opposed the merger. The moves discussed above have been placed in the analytical frameworks in Figure 10.5 to illustrate the character of each move presented above. The numbers in brackets in the preceding description refer to numbers in Figure 10.5 and will help in placing the game episodes in the frames of reference utilized in the analysis. The same form of presentation will be followed throughout this part of the chapter. The process of building the Unitas Sphere’s flagship from the start seems to have been a coherent process without major obstacles or trouble. A feature common for the companies that came to be merged with the sphere’s flagship was their familybased ownership structure. Traditionally the Unitas Sphere’s bank, the Union Bank of Finland, was the bank of wealthy Swedish-speaking Finns and thus the financier of their businesses. UBF’s financier role gave the Unitas Sphere a degree of leverage in many old family-owned companies and made it much easier to persuade them to merge. There were several family-owned companies operating in the forest industry that were tied to the Unitas Sphere, but some did break out to join other spheres. Sometimes such a breakout came as a total surprise, at other times it was expected but caused no reaction from the sphere.

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PRODUCTION CHAIN RAW MATERIAL

SA L E S & MARKET ING

SEMI-FINISHED

10

7

1

10

10

INTRASPHERE

ARENA

INTERSPHERE

7 9

COMBATIVE

8

10

CHARACTERISTICS OF THE EPISODE 4

1

5

6

AM ICABLE

TYPE OF MOVE OPENING/EXPANSIVE CLOSING/WITHDRAWAL MOVES M OVES 3

COMPANY DEALS

WAY OF MEETING THE S COMPETITOR COMPETITORS

1

5

10

COMBINING COMPANIES

7

COOPERATION

Figure 10.5. Events and moves in the Unitas Sphere.

4

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5.2 The KOP–Pohjola Sphere This was the Finnish-speaking equivalent of the Unitas Sphere, and traditionally a bitter rival to it. A commercial bank, KOP, and an insurance company, Pohjola, formed its core. The other most important companies belonging to this sphere were Rauma-Repola, United Paper Mills, WSOY and Huhtamäki. The KOP Sphere played a major role in the forest industry through several companies. United Paper Mills (UPM), however, was unmistakably the flagship of the sphere. The restructuring of the KOP–Pohjola Sphere’s forest industry was personified by one key individual, Mr. Jaakko Lassila, the president of KOP Bank, whose goal was to arrange KOP–Pohjola Sphere’s forest industry companies into one truly big flagship. The KOP–Pohjola Sphere did not have the advantage of having several family-owned forest industry companies inside the sphere’s confines as the Unitas Sphere did. Instead, there were two major publicly listed companies with rather dispersed ownership structures within the sphere: UPM and Rauma-Repola, the latter operating also in various sectors of the engineering and metal industry. There were other forest industry companies in the KOP–Pohjola Sphere but they were relatively small. The development process of the flagship company of the KOP– Pohjola Sphere is outlined in Figure 10.6.

Figure 10.6. The formation process of the KOP–Pohjola Sphere’s flagship United Paper Mills.

In 1985 the KOP–Pohjola Sphere was playing an active role in a long-drawn-out game that had been going on for some years. It involved three relatively small companies located in northern Finland. The KOP–Pohjola Sphere was seeking to merge Kemi and Oulu with Kajaani, a member of the sphere. The former companies, however, were members of other spheres, which naturally made it difficult for the KOP–Pohjola Sphere to proceed with its plan. In fact, the arrangement for which the KOP–Pohjola Sphere had been pressing for so hard did not materialize. Instead of a

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merger of all three companies, Oulu was acquired by the State Sphere’s Veitsiluoto, while half of Kemi was acquired by Metsäliitto, the flagship of the Agricapital Sphere. Thus Kajaani was left with only the other half of Kemi. The media referred to this episode as the Great Northern War (a reference to the war fought between Sweden-Finland and Russia, among others, from 1700 to 1721), and it ended in a bitter defeat for the KOP–Pohjola Sphere in 1986 (1). This was a combative intersphere opening move by the KOP–Pohjola Sphere involving semi-finished products (pulp, sawn timber) and finished products (paper, paperboard). There was less drama in the next episode. In 1987 Rauma-Repola, a member of the KOP–Pohjola Sphere, acquired a majority holding in Rosenlew, an old, familyowned company loosely linked to the Unitas Sphere. Rosenlew had been performing poorly for some years and sorely needed to make major investments. The owner families, the Rosenlews and von Frenckells, felt they could not provide the sort of sums needed and so decided to sell their shares in the company. They first offered their shares to the Unitas Sphere, but when it showed no interest, Rauma-Repola stepped in (2). This was an amicable, opening intersphere move that involved semifinished products (packaging materials) and finished products as well as raw material (90,000 hectares of woodland). In other words, Rosenlew was transferred from one sphere to another in an undramatic and peaceful way. The next two years saw a considerable strengthening of the KOP–Pohjola’s flagship, UPM, within the confines of the sphere. In 1988 UPM acquired Joutseno Pulp from Rauma-Repola (3). Prior to this, Joutseno Pulp had been jointly owned by UPM (40 per cent) and Rauma-Repola (60 per cent). The main reason for UPM’s move was that Joutseno Pulp had decided to build a fine paper machine to complement its pulpmill. This, in turn, would have deprived UPM of its share of Joutseno Pulp’s pulp production, a share that it needed almost desperately. Once the acquisition had gone through, United Paper Mills quickly aborted Joutseno Pulp’s paper machine project, even going so far as to tear up the foundations that had already been laid for the new papermill. In 1989 United Paper Mills was further strengthened when Kajaani was merged with it; this move had been widely expected for some years (4). Both these episodes took place in a combative intrasphere setting. They both included semi-finished products (pulp, sawn timber), and the latter move also included finished products (paper). The former was a closing/withdrawal move by Rauma-Repola, the latter a combining of companies within the sphere. In 1989 the KOP–Pohjola Sphere not only made intrasphere arrangements but also embarked on a major restructuring of its interests in the pulp industry. UPM established a new company, Metsä-Botnia, together with Metsäliitto and MetsäSerla from the Agricapital Sphere (5). The new Metsä-Botnia was created through a reorganization of several pulpmills. It consisted of the old Metsä-Botnia, in which UPM had owned 7.5 per cent of the shares and Metsä-Serla the rest, Kemi and Pohjan Sellu, both of which were jointly owned by the Agricapital and KOP– Pohjola Spheres. UPM held 42.6 per cent of the shares in the new Metsä-Botnia, and the Agricapital Sphere the rest. This was an opening, amicable intersphere move that paved the way for future cooperation. It involved semi-finished products (pulp).

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In 1990 the internal development of the KOP–Pohjola’s forest industry suffered a major blow when the Agricapital Sphere launched a hostile takeover bid for UPM through Metsä-Serla. This takeover move came as a complete surprise to the KOP–Pohjola Sphere and it responded by trying to tighten its grip on UPM by proposing a special share issue to its other forest industry company (in fact a multi-business company), Rauma-Repola. After this the KOP–Pohjola Sphere made a plan to merge UPM with Rauma-Repola to form a new conglomerate, Repola. Metsä-Serla naturally opposed this proposal and succeeded in having it withdrawn at an extraordinary general meeting. Later on, however, Metsä-Serla and the Agricapital Sphere reached an agreement with the KOP–Pohjola Sphere on the terms of the merger of UPM and Rauma-Repola, and the merger was realized later in 1990 (6). This was an intersphere event of an extremely combative nature. Although this encounter between the KOP–Pohjola and Agricapital Spheres was, to say the least, fairly antagonistic, it did not prevent the two parties from later cooperating in 1993, when they jointly established a new pulp company. UPM (now a part of the Repola Group) together with Metsäliitto and Metsä-Serla formed Metsä-Rauma to build a new pulpmill with an annual capacity of 500, 000 metric tons of pulp (7). This was an amicable, intersphere encounter between the Agricapital Sphere and the KOP–Pohjola Sphere involving semi-finished products (pulp). In 1995 something that had previously been considered absolutely inconceivable actually came to pass, and a new bank was born. The power centres of the of two rival spheres, the Unitas Sphere’s Union Bank of Finland and the KOP–Pohjola Sphere’s KOP Bank decided to merge and form a new bank to be called Merita (8). The reason behind the bank merger was the Finnish banking crisis at the beginning of the 1990s, which gravely weakened KOP Bank. In practice, a merger with UBF was the only viable solution available for KOP Bank. An obvious consequence of this landmark event in the history of the Finnish economy was the merger of the two spheres’ forest industry flagships, United Paper Mills and Kymmene. The new company, UPM-Kymmene, was formed in 1995. The bank merger was a somewhat combative intersphere episode that laid the foundations for the merger of the two forest industry companies, formerly members of rival spheres. It was a borderline episode with both intersphere and intrasphere features (Figure 10.7).

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PRODUCTION CHAIN RAW MATERIAL 2

SEMI-FINISHED PRODUCTS

PRODUCTS

1

9

SALE S & MARKETING 9

5

INTRASPHERE 3

4

ARENA

6

1

INTERSPHERE 6

8

COMBATIVE 9

CHARACTERISTICS OF THE EPISODE 2

5

7

AMICABLE

TYPE OF MOVE OPENING/EXPANSIVE CLOSING/WITHDRAWAL MOVES MOVES COMPANY DEALS

WAY OF MEETING COMBINING THE COMPANIES COMPETITORS

1

4

2

5

3

7

6

9

COOPERATION

Figure 10.7. Events and moves in the KOP–Pohjola Sphere.

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5.3 The State Sphere Throughout the 20th century the Finnish State has formed the core of one major sphere by being a significant owner of large companies. The most important stateowned companies have been Valmet, Alko, Finnair, Neste, IVO, Outokumpu, Kemira, Rautaruukki, Veitsiluoto and Enso-Gutzeit. The bank within the State Sphere was Postipankki. The State has historically been an important player in the forest sector and its flagship company has been Enso-Gutzeit. The widespread state ownership of industry is mostly due to the fact that in the beginning of Finnish independence the country’s entrepreneurs to a large extent lacked the capital needed to develop basic industry. Therefore, having more capital than individual entrepreneurs, the Finnish state set up a number of companies operating in basic industries in order to gain access to export revenues. State ownership in Finland has thus been more a pragmatic matter than an ideological one. In recent years the state has consistently decreased its ownership and involvement in numerous companies traditionally owned by it, not least within the forest industry. The key individuals in the State Sphere were distinctly different from either the Unitas Sphere’s or the KOP–Pohjola Sphere’s key individuals. At the sphere’s top level the key individuals were periodically changing, elected politicians serving as the Minister of Trade and Industry, the civil servants of Ministry of Trade and Industry, and the leading figures of the political parties, especially the Centre Party and Social Democratic Party. The two mostt permanent key individuals in the State Sphere were the CEOs of the State Sphere’s forest industry companies, Pentti Salmi of Enso-Gutzeit and Pentti Ruoholahti of Veitsiluoto. The developments surrounding Enso-Gutzeit are shown in Figure 10.8.

Figure 10.8. The formation process of the State Sphere’s flagship Enso-Gutzeit.

In 1985 the State Sphere became involved in moves to restructure three forest industry companies in northern Finland through Veitsiluoto Oy (1). The KOP– Pohjola Sphere had, as mentioned earlier, taken an initiative to merge Oulu and Kemi with Kajaani, which it controlled. Along with the senior management of Veitsiluoto, the State Sphere’s representative in the negotiations was the Ministry of Trade and Industry. Overall the situation was complicated as the Finnish State was the owner of Veitsiluoto, the co-owner of Kemi with the Agricapital Sphere and also the co-owner of Oulu with the KOP–Pohjola Sphere. This was a combative and intersphere episode by nature. It was an opening move that involved both semifinished products (pulp) and finished products (paper).

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Both Veitsiluoto and the Ministry of Trade and Industry had their own reasons for opposing the KOP–Pohjola Sphere’s plans. Veitsiluoto was very dependent for its wood procurement on Oulu’s resources. It followed that if Oulu were to be merged with Kajaani, Veitsiluoto would have been left standing alone in northern Finland without a sufficiently effective wood procurement system. Not surprisingly, Veitsiluoto wanted to bury the whole project as soon as possible. The Ministry of Trade and Industry then became a battlefield for political parties with differing views on the future of the state-owned forest industry in northern Finland. The Centre Party’s position was that the problematic situation of state co-ownership could not be resolved by the State buying out the private partners in the companies in question. The Social Democrat Party’s view was that it would be ideologically wrong to sell state-owned enterprises to the private sector. Since the Minister of Trade and Industry was a Social Democrat, the outcome was far from what the KOP–Pohjola Sphere had hoped for. Over the next two years Enso-Gutzeit played a more dynamic role than had previously been the case. In 1986 it decided to resign from Finnpap, the Finnish Paper Exporters’ Association (2). The reason for the resignation was a dispute over a paper grade change that Enso-Gutzeit was planning and that Finnpap opposed. In resigning from Finnpap, Enso-Gutzeit became the first Finnish forest industry company to rely solely on its own sales and marketing organization. In fact, the episode of the paper grade change was only the last straw for Enso-Gutzeit; there had been a long history of differences of opinion between it and the other members of Finnpap. That same year Enso-Gutzeit acquired Tervakoski, a small special-grade paper manufacturer, which curiously enough had been owned by the Bank of Finland (the Finnish Central Bank) (3). The resignation from Finnpap was a combative intersphere event that ended a long-term alliance with other Finnish paper exporters. The latter episode was, on the contrary, an opening, amicable intrasphere move that involved finished products (paper). In 1987 Enso-Gutzeit together with Ahlström, an old-established family-owned firm, carried out a major restructuring of their production units (4). In this deal Enso-Gutzeit acquired Ahlström’s pulpmill, papermill, paperboard mill, sawmill and power plant in the town of Varkaus in eastern Finland. As part of the purchase price Enso-Gutzeit transferred all its engineering units to Ahlström along with a packaging plant it owned. As a result of all this, Enso-Gutzeit became purely a forest industry company, and the largest one in Finland at that, while Ahlström became the third largest owner of Enso-Gutzeit with 11.7 per cent of the shares. This episode was an opening, intersphere move of an amicable nature that involved both semifinished products (pulp, sawn timber) and finished products (paper, paperboard). It also laid the foundations for future cooperation between Enso-Gutzeit and Ahlström. A deep-rooted animosity existed between the State Sphere’s forest industry companies, Veitsiluoto and Enso-Gutzeit. Enso-Gutzeit had wanted for a long time either to acquire Veitsiluoto or to merge with it. The two companies had long criticized one another, especially for the soundness of the rival’s investment decisions. This was understandable as both companies were competing for investment funds that to a very large extent came out of the state budget. For instance, when Veitsiluoto in 1989 decided to invest in a new paper machine so as to be able to use up the excess pulp it produced, Enso-Gutzeit regarded this decision as

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mindless, and was prompted to lobby the political decision-makers at the top of the State Sphere to stop the paper machine project and merge the two companies as soon as possible. But as so many times before, the political decision-makers were unable to reach agreement about what to do with the two companies. Veitsiluoto’s paper machine project went ahead and Enso-Gutzeit’s plans were thwarted, for the time being at least (5). This was a combative intrasphere episode in Enso-Gutzeit’s longterm project to get a merger. In 1990 Enso-Gutzeit sold its plywood and fibreboard mills to the Unitas Sphere’s Schauman Wood, which was a part of the Kymmene Group (6). This was an amicable intersphere transaction thatt enabled Enso-Gutzeit to concentrate on pulp, paperboard, fine and printing papers and integrated saw-milling. Not all of Enso-Gutzeit’s dealings with other spheres were as peaceful as this transaction, however. In 1993 and 1994 Enso-Gutzeit was involved in two major battles with the Agricapital Sphere’s Metsä-Serla over the ownership of two companies. The first struggle in 1993 centred on control over Tampella’s forest industry units (7), ownership of which had been transferred to the Bank of Finland as a result of the massive crisis in the Finnish banking sector in the early 1990s. The second battle was over a minority shareholding in Veitsiluoto (8), which had landed up in major financial difficulties after its paper machine investment, in part because of a fall in demand for paper. The Ministry of Trade and Industry decided to sell one third of Veitsiluoto to another Finnish forest industry company in a rescue operation. EnsoGutzeit emerged the victor from both these battles, twice beating off a strong challenge from the Agricapital Sphere’s Metsä-Serla for control of the stricken firms. Thus the Veitsiluoto game, which had gone on for decades, finally ended in 1995 when Veitsiluoto resigned from Finnpap (9) and the owner, i.e. the Finnish State, at long last took the decision to merge Veitsiluoto with Enso-Gutzeit (10). The battles over Tampella and Veitsiluoto were, in effect, both intersphere and intrasphere episodes of a very combative nature. They were intrasphere events in the respect that in both cases the companies that were battled over were state-owned, and intersphere in that in both battles the adversary was from the Agricapital Sphere. Both episodes involved semi-finished products (pulp, sawn timber) and finished products (paper, paperboard). The resignation of Veitsiluoto from Finnpap was a closing move of combative intersphere nature and ended a long-term alliance with the other Finnish paper exporters. The merger of Veitsiluoto with Enso-Gutzeit was also combative in nature but this time in an intrasphere setting. After the merger with Veitsiluoto Enso-Gutzeit took a new name, just plain Enso (Figure 10.9). The continuing competition for rather scarce resources within the State Sphere between Enso-Gutzeit and Veitsiluoto was widely seen as unsound, but the political decision-makers lacked the will to make the fundamental decisions needed to end the unhealthy situation. The idea of merging the two companies surfaced from time to time and Enso-Gutzeit’s CEO Salmi was on several occasions an eager proponent of such a merger. As can be imagined, the strongest opponent of such plans was Veitsiluoto’s CEO, Ruoholahti, who was a strong individual and a smart player, and who thus knew which buttons to push. Ruoholahti shot down the idea of a merger several times. He pleaded that jobs and the prosperity of northern Finland would be jeopardized should the merger go ahead; these arguments were very powerful weapons in the battle for Veitsiluoto’s independence over the years.

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Figure 10.9. Events and moves in the State Sphere.

9

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In the end, no arguments could prevent the sound decision to merge the two companies within the State Sphere and end the incessant rivalry between them. Finally in 1995 the merger took place after the intermediate stage of a strategic alliance between the two companies. The government used its power as the owner of the two companies and Enso-Gutzeit could be finally declared the winner of the war inside the State Sphere’s forest industry sector. The final victory over Veitsiluoto was achieved only after Salmi’s retirement. 5.4 The Agricapital Sphere The roots of this sphere can be found in the Finnish countryside and it still contains dozens of companies, many of which function on cooperative principles. The main firms regarded as part of the sphere were Tapiola Group, Metsäliitto, YIT Group, Lännen Tehtaat, Vähittäiskaupan Teollisuus, Hankkija and SOK. There was also a bank system consisting of the national OKO Bank and a network of local cooperative banks within the sphere. This sphere has origins very different to those of the aforementioned spheres in which commercial banks formed the core. Behind the Agricapital Sphere are tens of thousands of private forest owners (most of whom are also farmers). With this background the sphere had clear links to one of the key Finnish occupational interest groups, MTK (the National Association of Agricultural Producers), and to the main political force in the Finnish countryside, the Centre Party, which is also a very significant force on the national political stage. There were not so many key individuals involved in the decision-making about the major moves in the Agricapital Sphere. One who stands out is Mr. Mikko Wuoti, president of the Metsäliitto Cooperative, the main architect of the Metsä-Serla deal, i.e. the merger of Metsäliiton Teollisuus and G.A. Serlachius. Metsä-Serla’s development is depicted in Figure 10.10. The Agricap a ital Sphere METSÄRAUMA

METSÄ-SERLA METSÄLIITON US

Figure 10.10. The formation process of the Agricapital Sphere’s flagship Metsä-Serla.

In 1985 the Agricapital Sphere was caught up in the KOP–Pohjola Sphere’s attempt to restructure the forest industry in northern Finland (1). The Metsäliitto Cooperative was a co-owner of Kemi, one of the companies that the KOP–Pohjola Sphere wanted to merge with its own Kajaani. Metsäliitto declared that it wanted to be included in the reorganization and wished to play a significant role in the process, thus giving strong support to the KOP–Pohjola Sphere’s plan. Nevertheless, the plan was not realized in the scope or form intended by the KOP–Pohjola Sphere. Instead, as it turned out, the Agricapital Sphere and the KOP–Pohjola Sphere ended up co-

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owning Kemi, which was originally co-owned by the Agricapital Sphere and the State Sphere. This event was an opening, combative intersphere move by the Agricapital Sphere involving semi-finished products (pulp, sawn timber) and finished products (paper). A major restructuring across spheres took place in 1986. The Agricapital Sphere’s Metsäliitto and the Serlachius family announced after secret negotiations that Metsäliiton Teollisuus and G.A. Serlachius would be merged to form a new company, Metsä-Serla (2). This event came as a real surprise to the Finnish business community and differed from previous similar events in that the banks had played no role in the process. The merger was even more surprising because G.A. Serlachius was generally held to be a part of the Unitas Sphere, or at least quite closely linked to it. This was the first merger in the forest industry that crossed the borders of two spheres to create a new company within just one of the spheres. In effect the merger transferred a company from one sphere to another. Metsä-Serla became the flagship of the Agricapital Sphere. This intersphere event was so surprising that the Unitas Sphere did not have time to reactt to it. It was an amicable opening move that involved both semi-finished products (pulp, sawn timber) and finished products (paper). Another large-scale restructuring occurred d in 1989, when the Agricapital Sphere and KOP–Pohjola’s United Paper Mills joined forces in a strategic pulp alliance in the form of a new company, Metsä-Botnia, embracing several production units (3). In 1990, however, the Agricapital Sphere took a dramatic and what later proved to be an ill-conceived step: Metsä-Serla launched a a hostile takeover bid for United Paper Mills, which provoked a vigorous reaction from the KOP–Pohjola Sphere (4). Most of the game was played out of the limelight, and the two camps involved tried to maintain a harmonious facade in public. The Metsäliitto Cooperative and MetsäSerla repeatedly denied any hostile intentions, and the KOP–Pohjola Sphere tried to convince the public thatt the Repola manoeuvre (the plan to merge UPM with Rauma-Repola within the KOP–Pohjola Sphere) was not directed against the Agricapital Sphere. As was mentioned before, the merger of UPM and RaumaRepola finally took place at the second attempt in 1990. The first of the above mentioned events was an amicable intersphere episode that involved semi-finished products (pulp). The latter, which also was intersphere, was on the contrary, a very combative opening move by the Agricapital Sphere. The unsuccessful attempt to takeover UPM was one of the factors leading to Metsä-Serla’s financial difficulties in 1991. The other factor was a rapid and unexpected collapse in demand. As a result of these difficulties Metsä-Serla organized a share issue, in which the Metsäliitto Cooperative took up the majority of shares and Metsä-Serla became a subsidiary of Metsäliitto (5). This arrangement, however, breached an earlier covenant between the Agricapital Sphere and the Serlachius family. When Metsä-Serla was being created, the two parties had agreed that both of them would have equal rights in decision-making regarding the company. When Metsä-Serla became a subsidiary of Metsäliitto, the Serlachius family sold its Metsä-Serla shares and they were compensated with shares owned by Metsä-Serla in Repola to a value matching their holding in Metsä-Serla. This share swap took place the following year in 1992 (6). These events were interlinked and

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the former was an amicable intrasphere episode until the Serlachius family opposed it and it became in the next phase a combative episode. Over the next three years the Agricapital Sphere actively strove to strengthen Metsä-Serla by means of acquisitions. In 1993 and 1994 the Agricapital Sphere found itself twice on a collision course with the State Sphere. On both occasions, the attempted acquisitions of Tampella’s forestt industry units (7) and of the minority shareholding in Veitsiluoto (9), the Agricapital Sphere was defeated by EnsoGutzeit from the State Sphere. The Agricapital Sphere was very dissatisfied with the outcome of these two struggles and accused the top politicians who made the decisions in the State Sphere of unjustly favouring Enso-Gutzeit. Both events were opening, very combative intersphere moves by the Agricapital Sphere. In 1993 the Agricapital Sphere entered into intersphere cooperation with the KOP–Pohjola Sphere. The Metsäliitto Cooperative and Metsä-Serla established a new pulp company, Metsä-Rauma, with United Paper Mills of the Repola Group in the KOP–Pohjola Sphere (8). At the end of the period under study in 1995, the Agricapital Sphere made a new strategic alliance with Myllykoski (11), an old family-owned paper company, and it announced its willingness to buy Enso-Gutzeit from the State Sphere (10). In 1995 Metsä-Serla also acquired an old family-owned papermill, Kyro Oy. The Metsä-Rauma arrangement as well as the Myllykoski alliance were opening cooperative moves. The Myllykoski alliance did not affect any other spheres, since Myllykoski was not part of one. The move involved finished products (paper), and sales and marketing. The Metsä-Rauma alliance was for its part an amicable intersphere episode involving semi-finished products (pulp) (Figure 10.11). The Agricapital Sphere may be seen as acting more as a collective force without many visible key figures apart from Mr. Wuoti and his successor, Mr. Matti Puttonen, one of the architects of the attempted takeover of United Paper Mills. One possible explanation for this is the cooperative tradition lying behind the sphere’s business activities. The plans were made and executed by a group of people who were not really visible or identifiable outside the Agricapital Sphere. Another feature typical of the Agricapital Sphere was its aspiration to increase its influence in the forest industry sector. The Agricapital Sphere was very active, even aggressive in its attempts to strengthen its role in the Finnish forest industry. This hunger for growth and increased influence was the result of the ownership structure of the Metsäliitto Cooperative. The private forest owners, who own over two thirds of the woodlands, are of course very much interested in having in their own hands as big as possible a user for their wood.

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Figure 10.11. Events and moves in the Agricapital Sphere.

5.5 Putting It in a Nutshell We have been observing chains of events along four paths. The tales have been lively and each has been unique. The key word describing all of these chains is, however, consolidation which seems to be the case globally as well (see Lamberg;

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Lamberg; Ojala and Lamberg; Ahola; Melander, in this volume). Each grouping tried to become stronger by concentrating, and in some cases by co-operating. A comparison of the overall progress made by each sphere reveals consistencies in their strategic gamesmanship. It is time now to summarize, interpret and speculate on these developments and to speculate, too, on the applicability of the instruments we have used to explore these developments. 6 DISCUSSION AND CONCLUSIONS It is time to turn to the big picture. We will proceed first by describing and interpreting the empirical strategy processes in their entirety. Only then will we start speculating on the definable empirical findings and the relevance of our conceptual approach. 6.1 Empirical Outcomes Interpreted To outline a synthesis of the strategies followed by the different spheres and their flagships we will utilize our gamesmanship frameworks. When we start by observing the foci of the moves in the different spheres, we cannot recognize any differences between the flagship companies of the four spheres. All the spheres concentrated on strengthening their semi-finished and final product sections of the chain, as depicted in Figure 10.12.

Figure 10.12. The nature of the game: the strategic foci of the different spheres.

It has to be noted that at the next lower level of analysis, the product assortment level, we would have found many differences between the flagships, since all of them gradually specialized on certain core product groups. However, when the development is analysed through the other two frames of reference, noteworthy differences are revealed. The evolution within the Unitas Sphere mainly followed the route of internal development dominated by amicable intrasphere activity, which resulted in the formation of Kymmene.

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The change process in the KOP–Pohjola Sphere took a rougher path. It began by the sphere taking an active part in the Great Northern War and continued by internal construction. This building work was not amicable. The sphere again found itself in the middle of a combat zone when Metsä-Serla attacked United Paper Mills. What is interesting to compare at this point is the direction of change in the corporations of both the Unitas and the KOP–Pohjola Spheres. Kymi-Strömberg was moulded from a multi-business corporation into a forest industry company, whereas in the case of the KOP–Pohjola Sphere the development took the opposite direction: from forest industry company into a multi-business one. The first process was a clear streamlining one. The second process on the contrary widened the scope of operations to include unrelated businesses, which, taking into account the then prevalent tendency in business towards concentrating on core businesses was an atypical move. The two processes are outlined in Figure 10.13. Forest Industry Company

The Unitas Sphere

Multi-industry Corporation

The Unitas Sphere

Kymmene

The KOP-Pohjola

The KOP-Pohjola Repola

Figure 10.13. Two flagship change processes.

The Agricapital Sphere’s story is an account of an extremely active player. The Agricapital Sphere was always around when something was happening, and it was there as an aggressive player. As a consequence, the game atmosphere tended to be combative, and the arena in which the game was played was usually an intersphere one. Unlike the Agricapital Sphere, the State Sphere obviously wanted to construct its path peacefully, but it could not do so since a lot of tension arose along the way and this tension was generated both inside and outside the State Sphere. Figure 10.14 displays the spheres located in the second frame of reference according to their strategic focus.

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INTERSPHERE

The COMBATIVE

KOP Pohjola

Characteristics of the episode

The

AMICABLE

Unitas Sphere Cooperation

Figure 10.14. The nature of the game: the strategic foci of the different spheres.

The strategy of the Unitas Sphere was mainly intrasphere and amicable by nature. The KOP–Pohjola Sphere can be placed mainly on the combative side. It covers the sections of both intrasphere (Joutseno Pulp, Kajaani) as well as intersphere (The Great Northern War, Repola merger) activity. The location of the Agricapital Sphere is the easiest one to identify: it is the combative, intersphere corner. Finally the State Sphere has ingredients from all four sections, the Veitsiluoto and Tampella developments being highly combative and both intrasphere and intersphere by nature, the Tervakoski deal being intrasphere and amicable, and finally the dealings with Ahlström being intersphere and also amicable by nature. The picture is completed by marking the alliance between the KOP–Pohjola and Agricapital Spheres. Although for the most part they were fierce rivals, they did embrace to establish a new pulp company, which they both needed to secure an adequate raw material flow. When moving to the third frame of reference we again find clear differences. We will limit our examination to the expansive activity only, since the major differences between the spheres are most noticeable there. The strategy of the Unitas Sphere was that of company deals and mergers. The KOP–Pohjola Sphere engaged in alliances in addition to deals and mergers. The Agricapital Sphere used alliances not only in the pulp industry but also with entire companies, as the case of Myllykoski shows. Deals (Kyro) and mergers (G.A. Serlachius) were also utilized as a means of expanding. The State Sphere followed the merger strategy and it is obvious that it only used deals when preparing a merger, as is outlined in Figure 10.15.

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EXPANSIVE MOVES

COMPANY DEALS

COMBINING COMPANIES

Unitas Sphere

KOP Pohjola Sphere

Agricapital Sphere

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Figure 10.15. The nature of the game: the strategic foci of the spheres related to expansive moves.

The path taken by the Unitas Sphere was for much of the time one of internal development, its strategy being mainly one of an intrasphere, amicable nature until the last big move was performed and UPM-Kymmene took shape. At the beginning of the period the KOP–Pohjola Sphere was involved in a prolonged intersphere struggle, after which it embarked on a longish period of internal construction work. This internal construction was interrupted by the launching of the Agricapital Sphere’s assault a on United Paper Mills, which led first to the birth of Repola and finally to a shotgun marriage with Kymmene. The strategy of the Agricapital Sphere may be characterized with good reason as an intersphere one throughout the whole period. Its strategy was usually combative, but as far as pulp companies were concerned, r it was also prepared to pursue an amicable, alliance-based strategy. Whenever something big was happening, the Agricapital Sphere seemed to be involved. The State Sphere expanded mainly through intrasphere company acquisitions and mergers, but nearly all moves contained an intersphere element and combative character, especially in dealings with the Agricapital Sphere. 6.2 General Findings Based on the Empirical Gamesmanship Study In our view gamesmanship ideas and concepts form a serviceable set of instruments for the study of our subject. It is obvious that such a set of tools can be used to perceive the course of events in many other industries, especially ones where the overall character, structure and history resemble the subject of our study. It is furthermore highly probable that the utility of the approach is not restricted just to a

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certain geographical area. We are prepared d to claim that the global game in the forest sector could be delineated with the help of gamesmanship tools, too. Of course, a global analysis would be a much more difficult undertaking. Many more players with different backgrounds in varying geographical, political and cultural contexts would have to be included in the analysis in order to get the total picture. To sum up, in our view the gamesmanship perspective is appropriate for the analysis of industry-level formation and restructuring processes. It is especially well suited for analysing courses of events where competitive tension is great, and the need for concentration is pressing. The second area where the value of the gamesmanship approach is readily apparent is in the strategy tracking of individual companies (or in this case spheres and companies). When the moves of the spheres were analysed, it was possible to discern common threads, that is, strategies. The final strategic development sometimes seemed to take shape under the pressure off alternating forces and counterforces, as we observed, for example, m in the Great Northern War, the formation of Repola, or in the several struggles between Enso-Gutzeit and the Agricapital Sphere. Thus, strategic development progressed only partially as planned, and some of the time it took odd and unanticipated turns because of outside pressures. The empirical characterization of strategies, however, conjures up an a major difference between our game entity and the original version of game theory: the empirical game typically does not end. There is a good reason to make a distinction, as Carse (1986) does, between finite and infinite games. In his view a finite game is played for the purpose of winning, while the purpose of an infinite game is to continue the play. Events or episodes in the forest sector come to an end, but the situation at the end of an episode is merely the starting point for new events. Only in a situation where an entire industry disappears is it justifiable to talk about the end of the game. Normally companies are born, they die and merge with others, and it is the game that continues in a new setting with another cast of players. Another major difference between our empirical analysis and game theory is that the situation at the start cannot really be perceived at a single glance. Behind every situation there is a history, often a long one. Any given situation is a result of earlier events, one consequence of earlier planned and/or realized strategies. Thus, moves and countermoves cannot be explained solely with the rational logic which a game theoretic view of the situation would elicit. It needs to be emphasized that our approach brings a much needed comprehensiveness and a taste of reality, but it also produces loose and undefinable elements. The third area on which our approach can shed a lot of light is the human side of strategy-making. Successful strategists are blessed with fox-like cunning. What is more significant, though, is that their knowledge of the total picture is limited. The time available for reflection when a decision is being made seems to vary. Sometimes there is no hurry at all and outcomes emerge gradually, as happened in the long duel between Enso-Gutzeit and Veitsiluoto. Sometimes, however, decisions must be made in a desperate hurry, as was the case with the KOP–Pohjola Sphere when the Agricapital Sphere launched its attack. Thus it seems that the type of logic which the players used was highly subjective. In addition, the moves in our pattern

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of play were not merely matters of decision-making. It has to be understood that a great deal of networking, lobbying and leadership was needed in most episodes. This observation is far removed from the world of traditional game thinking. There is one more important feature in our way to use the gamesmanship frame of reference. This is the idea of our frame of reference being a metaphor, which is our fourth theme of discussion here. The use of metaphors in itself is a convenient, simple and effective way ‘to say it in other words’ (see Morgan 1993). A typical motive for the use of metaphors is that they y facilitate the understanding of abstract subject matters in concrete and familiar terms (Gibson & Zellmer-Bruhn, 2001). But at the same time, there is the problem of the metaphor’s contractual nature, a dilemma seldom explicitly underscored. It happens to be the case that we may see our subject with the aid of the game-playing metaphor (both as a general idea and in a detailed way), but we do not have to see it like this. The contractual nature of metaphors raises another important issue. When describing the moves of our game, we used three basic frames of reference. Why three? Why not use two or six? There are no rules for laying down the ‘right’ number of reference frameworks in situations like this. A suitable number must be justified and we believed that in this case three was sufficient for dealing with spheres, companies and key individuals. This is not all, however, that we have to say about conceptual and theoretical issues. There are still some issues related to the intrinsic nature of playing and the playing field that need to be dealt with. When we use the word ‘game’ it usually brings to mind things like ice-hockey, soccer, volleyball, tennis, marathon running, discus throwing, motor racing, chess, bridge or poker. In other words: sports, gambling and pastimes. The relationship between a real game and our metaphorical strategy game is our fifth topic of discussion. In sport or gambling, of course, there is a large number of elements which can be found in business (Clancy 1989) or, in our case, strategy-making. Sports and strategy-making are both goal-orientated and directed towards success. Cooperation and teamwork as well as leadership play an important role. These features are represented in sport in coaching, captainship and heroism. The difficulty of achieving anything and the satisfaction that achievement brings are common to both. Success in business or top-level sport is not possible without the expenditure of enormous effort. Gambling, in addition, resembles strategy-making in that it involves risk. Players, winning and losing, rules, playing fields, and time constraints are, however, things that are strictly defined in sport. Without such definitions no sport or gambling game would have an end, nor would there ever be any result. Sport and gambling, with the clear characteristics we have just mentioned, are manifestly finite games; in both the game has an end and a clear winner. Strategymaking meets these preconditions for a finite game either only loosely or else not at all. Winning and losing are not clear concepts as in sport. In the cases studied here it is usually possible to name a winner, but sometimes there were several winners, and sometimes there was no clear result. The boundaries of the playing field do not limit individual players; a player may expand from being a single-industry corporation into a multi-industry one, or they may take the opposite route.

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Rules in business mean thatt the players should conform to the laws and customs of the country. This brings in a lot more flexibility than in sports or gambling. When it comes to moves, a much greater degree of freedom is also allowed in business life than in sport, where normally all permitted and prohibited activities are explicitly listed and known to the parties involved. As to the scope of activities covered in moves in business, there is a rich assortment available beyond those covered by our three frameworks; moves can, for instance, involve product selection, markets and segments, distribution channels, technology alternatives, variations in raw materials or modes of financing. As we determined earlier, it is vital to understand that the game we have examined here was infinite; it has not ended. As a result of the forest game described above, there were fewer competing spheres and companies left. The game, however, went on, and on the wider international playing field it was being played with greater enthusiasm than ever before as is apparent based on the case evidence presented in this volume. Moreover, within the economic context there was a new governmental and intergovernmental institution, the European Union, which, by preventing megamergers does not even allow the game to end in any field of activity because competition is felt to be beneficial for mankind. As far as the motives of individual players of the infinite games in our study are concerned, however, it seems most likely that they were not participating in the game for the sole purpose of continuing it. We believe that their motivation was probably more egocentric. Naturally they wanted the game to go on, since the continuation of the game gave them the only possibility to achieve their goals: the success of the sphere, and of their companies and their own personal success as individuals. In 1983 Donaldson and Lorsch published a study of contemporary American business leaders entitled ‘Decision Making at the Top’. The authors concluded that their leaders were fundamentally gamesmen, people motivated to win the game they were playing. The authors of this chapter claim that this holds true in Europe, too. The key elements of the strategic gamesmanship approach are the concepts of man, strategy, players, arena and moves. Game-playing means intentional action. The players are bounded as to their rationality, they are often not well aware of the true situation in which they are playing and they are also often f satisfied with disoptimal outcomes. The arena, then, is a concrete platform of players, like an industry, a mixture of industries or set of clusters. Moves refer to deeds, and typically different players have a wide repertoire of moves to select from. All this takes places in a very human setting where business, social and cultural elements are inseparable. This gamesmanship thinking, finally, is located between game theory and game philosophy, in the middle of the game continuum together with other less rigorous schools such as implicit and explicit game approaches as well as the politicking sect. Clearly, we do not have a sophisticated strategic gamesmanship theory, yet. We have only embarked on the work, but the subject is so fascinating that the effort will not be in vain. It is well worth remembering what Andrew Carnegie (Winkler 1931) had to say about the matter: ‘Business is the greatest game in the world.’

CHAPTER 11

THE EPHEMERA OF SUCCESS: STRATEGY, STRUCTURE AND PERFORMANCE IN THE FORESTRY INDUSTRIES JARI OJALA University of Jyväskylä e-mail: [email protected]

JUHA-ANTTI LAMBERG Helsinki University of Technology e-mail: [email protected]

ANNA AHOLA Helsinki University of Technology e-mail: [email protected]

ANDERS MELANDER Jönköping International Business School e-mail: [email protected]

As with any research process, the one resulting in this collection of articles was driven by several motivations. First, the forest industry sector is important from an economic and social perspective. It is especially so in small economies like Finland and Sweden but it also plays a role in the larger context of the world economy: In the late 1990s, the forest cluster as a whole employed four million people in the European Union, and its share of the total value of industrial production in the EU area was around nine per cent (Lammi, 2000c; Paavilainen, 2000). In 2003, the value of forest industry production in the world was around 414 billion U.S. Dollars – in comparison, the value of the car production industry was about 1060 billion dollars in 2003. From this, around 26 per cent was produced for communication (e.g. newsprint, printing and writing papers), 34 per cent for 257 Juha-Antti Lamberg, Juha Näsi, Jari Ojala, and Pasi Sajasalo (eds.), The Evolution of Competitive Strategies in Global Forestry t Industries: Comparative Perspectives, 257–286. © 2006 Springer. Printed in the Netherlands.

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packaging and miscellaneous papers (such as hygienic and health care papers), 20 per cent was sawn timber, 16 per cent different kinds of timber slabs, and four per cent market pulp (Economist 2004b; Diesen, 1998; Forestindustries, 2005). Compared, for example, to the car industry, the concentration process in the paper and pulp industries has been slow: whilst in the early 20th century there were over 4000 paper and pulp industry companies in the world, the figure was around 1700 by the end of the century (Lamberg and Ojala, in this volume). At the same time the number of companies within the car industry has diminished from 270 to seven big groups and three smaller ones. The top six groups in the car industry accounted for some 70% of global sales at the beginning of the 21stt century. The top-ten paper companies produced only around one fourth of the top-1000 companies’ production at the same time. (Economist, 2004a, 2004b; Siitonen 2003) Thus, the forest industry represents the group of relatively mature, large-scale industries that have gradually become ‘more global’ during the last couple of decades. This creates the rationale for our more theoretical ambitions. According to the population ecology (Hannan & Freeman, 1989) and evolutionary economics (Nelson & Winter, 1982, Murmann, 2003, Murmann and Homburg, 2001) literature, f cycles as well as we are already well aware of the typical structure of industry life the relationship between the demography of firms and the surrounding organizational environment. However, we know considerably less about how these processes affect the competitive behaviour of particular firms and why industry leadership changes over time. This has been the main mission of the book and continues to be the underpinning question in the context of this concluding chapter. The aim of this chapter is to conclude the main findings of the book by systematically comparing the strategy evolution of the case companies, together with an analysis of the growth and economic performance. Nordic companies in this analysis include Stora-Enso, United Paper Mills, Kymmene, Metsäliitto, SCA, MoDo, Ahlström, and Schauman. The U.S. firms include International Paper, Mead, Weyerhaeuser, Georgia-Pacific, and Gulf States Paper1. In the following, if not otherwise stated, “Nordic companies” and “U.S. companies” refer only to the aforementioned case companies. Still, one should note that a number of important Nordic and U.S. companies were left outside the analysis, not to mention other European, North-and SouthAmerican companies, and Japanese big players such as Oji Paper and Nippon Paper Industries, together with South-African companies Sappi and Mondi (see e.g. Noda, 2003). This is an obvious limitation which will hopefully be addressed in future studies. The key question is to try to understand how and why the Nordic companies caught up American forest industry firms during u the post war period? As stated in the introduction (Figure 1.1) this development occurred only after the early 1950s and especially after the mid-1970s. For example, in the late 1950s the North American firms clearly dominated the top-50 list of the biggest paper companies – only four Nordic companies made it to the list, namely, Enso-Gutzeit (19), Holmen (32), Kymmene (46), and United Papermills (48) (PP-International, 1960). The case 1

Gulf States Paper is not, however, included in the financial analysis.

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studies (Chapters 2 – 8) shed light on the issue from the individual companies’ point of view. However, the questions regarding path dependence, the effect of national background and governance structure and the effect of the industry dynamics vis-àvis company specific actions can only be made more explicable via this comparative exercise. This article will focus, first, on the growth and economic performance within the companies, analysing growth of sales, investment patterns, and overall productivity and profitability. Thereafter, we analyze the patterns of strategic actions by using the event analysis methodology that links the case studies to the overall mission of the book. In this we focus on how the companies competed through the entire period and what were the underpinning strategies driving competitive actions. In the last part we triangulate strategy actions, financial performance and the historical interpretation to offer a ‘whole picture’ of the development patterns and the causes leading to the changes in the industry structure. We continue to split the entire study period into four distinct eras, namely: 1848 – 1945 (Period 1), 1946 – 1960 (Period 2), 1961 – 1980 (Period 3), and 1981 – 2003 (Period 4). The data used in the case studies in this volume, is reformulated to be in accordance with the periods used in this section. Furthermore, certain actions are equalized to be more comparable. Thus, there are slight differences in the number of cases in certain periods in comparison to the case studies. 1 GROWTH AND ECONOMIC PERFORMANCE Since 1950, the average annual growth of the paper industry has been around four per cent. The growth exceeded, for example, in Europe GDP growth during the last decades of the 20th century, and grew three times faster than in manufacturing industries on average (Diesen, 1998; Rytkönen, 2000). The main period of growth within the analysed forest industry companies occurred in the 1990s and during the first years of the 21stt century (Figure 11.1). As can be detected from the Table 11.1, around 50 per cent of the post war sales were produced during the last 13 years analysed. A striking factor is that within the Nordic case companies this share was 61 per cent, whilst with the U.S. case companies only 46 per cent. This demonstrates that the growth has been especially rapid within the Nordic companies analysed at the turn of the century. Also, the Nordic companies’ share of total turnover from the analysed firms was around one fifth from the 1940s up to the 1970s (Table 11.2). However, already during the 1980s the share grew to one fourth and during the next decades it was already around one third. The U.S. firms share diminished respectively. Why, then, have Nordic companies grown, in relative terms, so rapidly during the past couple of decades? Both in the Finnish and Swedish case a number of similarities can be found, as is stated by Lamberg, Ojala and Lamberg, and Melander, in this volume. These include large-scale investments to new production and technology, consolidation process, and the overall importance of the forest cluster in national economies, especially in Finland (Hazley, 2000; Jääskeläinen, 2001; Kuusela, 1998; Lammi, 2000a; Seppälä, 2000b). Moreover, as Seppälä has noted cheap energy supplies, constant growth in demand, durable raw material

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supplies, modern production machinery, and the special role played by the forest cluster in economic policies have been important in achieving the growth within the forest cluster in Finland (Seppälä, 2000a). Although having a different history, these growth factors explain at least parts of the Swedish development as well. Table 11.1. Division of combined sales to different decades, 1945 – 2003 (per cent shares).

1945-1959 1960-1969 1970-1979 1980-1989 1990-1999 2000-2003 1945-2003

Nordic 3 6 11 18 40 21 100

U.S. Together 6 5 10 9 18 16 21 20 30 33 16 17 100 100

Sources: Annual Reports.

100000

10000

1000

19 45 19 49 19 53 19 57 19 61 19 65 19 69 19 73 19 77 19 81 19 85 19 89 19 93 19 97

100

Nordic

US

Sources: Annual Reports.

Figure 11.1. Average annual sales, Nordic and U.S. companies, 1945 – 2000 (def. 2003 mil. dollars, log.).

One should note that there has been growth also within the U.S. firms during the whole period (Figure 11.1). A typical feature seems to be the similarity within the growth rates between different firms (as stated in the case studies in this volume), and also between different regions. This refers to the similarity of the business development as a whole in global terms. Furthermore, u the U.S.-based firms analysed in this study were on average significantly larger than their Nordic competitors. Up to the 1980s both U.S. and Nordic companies grew at about the same pace. The macro-economic regression in United States in the early 1980s might explain on the one hand the relatively slow growth at the time. On the other hand, in the 1980s

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U.S. firms divested diversified parts of their business activities which in turn resulted in slow growth rates. From the late 1980s the U.S. firms again grew quite steadily. However, Nordic companies grew especially fast from the late 1980s up to the late 1990s. Again, from the late 1990s the growth of the U.S. firms has been rapid, even more significant than within the Nordic companies. Still, U.S. firms lost their proportional share in average production (Figure 1.1), and also in sales (Figure 11.1). Can we, then, find the determinants of why U.S. firms have lost their proportional share in sales? As stated in this volume, the reasons for this development may be located in the socio-economic conditions that were clearly more favourable in Europe than in U.S. after the 1960s (Ahola in Ojala and Lamberg, and Melander, in this volume). Most strikingly, the demand for the forest industry products grew slower in U.S. than in Europe during the 1980-1990s. Also, the industry obtained a less favourable position in the industrial policy of the U.S. government than it did in especially Finland and Sweden (Ahola, and Ojala and Lamberg, in this volume). Furthermore, devaluations in the Nordic countries seemingly helped the forest industry companies in that they were not forced to be as low cost oriented as their North American rivals. Even more important is the structural change in the Nordic forest industries as the relatively small companies were merged to larger units for about a ten year period from the mid-1980s up to the mid-1990s. This enabled Nordic companies to carry out, for example, larger and more expensive investment projects. In turn, at the same time, U.S. companies divested small units which resulted in diminishing total sales. Finally, as stated by a number of top managers of the North American paper companies in the late 1990s, the North American companies were slow to change and focussed primarily on being low-cost producers rather than seeking different cost structures, performance objectives or built alliances to exploit new opportunities in emerging markets which their (Nordic) competitors were doing in the same period (Finchem, 1997). This, however, can be explained also from the perspective that the surrounding societal environment and financial market did not favour investments to the slowly growing or even declining industry. Table 11.2. The shares from the Nordic and U.S. companie’ total turnover (per cent).

1945-1959 1960-1969 1970-1979 1980-1989 1990-1999 2000-2003 1945-2003

Nordic 19 21 21 26 35 35 29

Sources: Annual Reports.

U.S. Together 81 100 79 100 79 100 74 100 65 100 65 100 71 100

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1.1 Investments In the paper and pulp industry, mills are complex and capital intensive (Diesen, 1998; Siitonen, 2003). As Berends and Romme (2001) state, producing pulp and paper in a competitive manner requires significant scale economies and thus large amounts of invested capital. Still, it takes a number of years from the investment decision to the moment the new capacity is available for actual production. This, in turn, is a major cause for the cyclicality in the industry (Berends & Romme, 2001). In the paper and pulp industry, the investments occur usually in large lumps, which in turn delimit the investors short-run output (Christensen & Caves, 1997). Table 11.3. The technological development and key products of the paper and pulp industry during the different periods. Period Technological developments Key products Period 1 Adoption of virgin timber as the main source newsprint, paperboard of pulp (& paper), sulphite and sulphate pulp; mechanisation Period 2 Rationalisation off production, integrated newsprint, fine papers mechanisation of production processes Period 3 Automation and computerisation of coated magazine papers, fine production control systems, environmental papers, recycled papers for issues, recycled fibre, from sulphite to newsprint sulphate in pulp Period 4 “Giant machines”, improved productivity, coated papers, “wood-free” papers, converted products, integrated units, reduced adhesive papers energy use, environmental issues, new raw materials Sources: Lammi, 2000; Häggblom, 1999; Hazley, 2000; Kettunen, 2002.

The investments are, of course, related to the technological development within the industry (Table 11.3). The industry on the whole accelerated in the mid-19th century after the adoption of virgin timber as the main source of pulp and paper. Throughout the period mechanisation, rationalisation, and lastly automation have been key concepts. The production facilities and machines have grown larger respectively. Due to the large production facilities the paper and pulp industry is among the most capital intensive lines of business (Häggblom, 1999). To simplify, one can argue that the value added of the production increased in hand with the quality and technology intensity of the products. As the low-tech and low-value paper grades one can mention newsprint and uncoated wood free grades (such as WF), and in the other end of the spectre as high-tech and high-value coated paper grades (such as LWC, MWC, and WFC)2. (Hazley, 2000) Especially Nordic companies have emphasised the production of high-tech and high-value grades in the investments during the 1980s and 1990s. The sources for the innovation have been jointly owned 2

WF = Uncoated wood free; LWC = Light Weight Coated; MVC = Medium Weight Coated; WFC = Coated wood free.

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research units (such as Central Laboratory in Finland), public research institutions (like universities), machinery production firms, and also companies themselves, though the share of research and development from the turnover has been traditionally relatively low within the forestt industry companies (Kettunen, 2002). As Chandler (1990, p. 113) states, in the paper industry “the technology of production was not complex enough to provide an incentive for a substantial investment in research and development”. Therefore, right after the Second World War, the paper industry had one of the lowest research intensities of among the lines of business with large corporations in USA (Chandler, 1990) The technology development within the paper industry can be divided to products, processes, supporting areas (like automation and chemistry), and to other technological development (including, for example, business organisation). The new products are usually developed within the companies, whilst processes are traditionally developed by component manufacturers. (Jokinen and Heinonen. 1987; Airaksinen, 1988). Certain companies have been especially active in research and development. For example, the strategy committee of the Kymmene was jealous of the product development carried out by United Paper Mills in the 1970s and early 1980s3. In pulp production, for example, important innovations such as Chlorinedioxine bleaching were carried out by Swedish companies Korsnäs, MoDo, and Stora. Finnish companies have been innovative in (coated) magazine papers, and one can mention SC-magazine paper for offset press like WSOP developed by Metsäliitto and coated wood-free paper (MFC) which has been especially developed by UPM, Enso, and Kymmene. In fine papers, Metsäliitto made in the 1980s and 1990s path breaking innovations in introducing aspen as raw material. (Häggblom, 1999; Kettunen, 2002). The growth in demand in certain paper grades has obviously motivated or even forced the companies to invest in order to maintain of even increase their market share. Technological development has been occasionally fast, leading to larger and more expensive machinery (Diesen, 1998). At the same time, investments to environmental capital expenditure investments have grown in importance (Clarkson, Yue, & Richardson, 2004; Kriström & Lundgren, 2003). This occurred at the same time as the pollution caused by forest industries gained attention in the public domain especially from the late 1960s on. The amount of investments carried out by the companies illustrates the role played by organic growth (Figure 11.2). Especially from the mid-1980s up to the late 1990s Nordic companies outperformed their American competitors in terms of investments. During the 1980s around 64 per cent of the total investments of the case companies were made by the Nordic firms, and this figure was even higher, around 70 per cent, during the 1990s (Table 11.4). This is a striking change since during the 1960s and 1970s the U.S. companies were responsible for around three fourths of total investments. Therefore, it is tempting to say that these investments made during the 1980s and 1990s were the backbone to the success for the Nordic companies, though they were also criticised at the time (Pohjola, 1996; compare 3

See, for example, Archives of Kymmene Corporation, Strategic Planning Committee of the Kymmene Group December 20, 1983.

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Artto & Juurmaa, 1999; Diesen, 1998). Furthermore, there are even significant differences between the companies in terms of efficiency of investments – measured, for example, in the capital spent per ton of new capacity (Siitonen, 2003). The role played by the investments can be stressed, for example, by the fact that during the 1980s the Nordic companies produced around 26 per cent of total sales (Table 11.2), but at the same time were responsible for 40 per cent of the combined investments (Table 11.4). Even during the 1990s the investment rate was high in the case of Nordic companies yet in the beginning of the 21stt century U.S. companies invested proportionally more compared to their share from sales. The reason for that was the fact that companies were forced to increase capital spending after several years of reducing outlays for new plant and equipment (Pulp, 2003). Still, in the long run North-American firms have not been as eager investors as their Nordic competitors, though already in 1975 the president of Weyerhaeuser, George Weyerhaeuser stated that the North-American forest industry could achieve by 2000 a position in world trade in forest products similar to that of the Persian Gulf with regard to oil – if only enough investments could be carried out (PP-International, 1975). On average, the investment rates were in the Nordic companies around 13 per cent and in the case of U.S. based companies 8 per cent from the 1960s up to 2003 (Table 11.5). However, the absolute value of investments was bigger within the U.S. based firms throughout the period, simply because they were larger (Figure 11.2). 16000 14000 12000 10000 8000 6000 4000 2000

19 45 19 49 19 53 19 57 19 61 19 65 19 69 19 73 19 77 19 81 19 85 19 89 19 93 19 97 20 01

0

Nordic

US

Sources: Annual Reports.

Figure 11.2. Total Investments by the Nordic and U.S. companies (def. million 2003 U.S.$).

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Table 11.4. Nordic and U.S. companies share from combined investments, 1960 – 1999 (per cent).

1960-1969 1970-1979 1980-1989 1990-1999 2000-2003 1960-2003

Nordic 29 26 40 39 22 35

U.S. Together 71 100 74 100 60 100 61 100 78 100 65 100

Sources: Annual Reports.

Table 11.5. Investments from turnover, per cent averages.

1960-1969 1970-1979 1980-1989 1990-1999 2000-2003 1960-1999

Nordic 13 13 13 11 6 13

U.S. Together 8 9 10 11 7 9 8 9 11 9 8 9

Sources: Annual Reports.

Investments alone cannot explain the fast growth of the Nordic companies, though the growth in rate of investments exceeded the growth of sales in several years. Especially in case of the Nordic companies, the consolidation process from the early 1980s can be regarded as a major determinant for the development. In Europe, the top ten companies increased their share of total sales from less than one third in 1980 to around 50 per cent by 1995 (Diesen, 1998). In Finland, according to Heikkinen (2000), there were over twenty individual paper companies during the 1920s, and by the mid-1980s the number had decreased by only a couple of companies. Only from the mid-1980s onwards, as stressed in Näsi (2001), the number of companies within the paper industry diminished rapidly. During the rapid consolidation process in the mid-1980s the number of independent paper and pulp companies in Finland decreased from almost 30 to four major players (Stora-Enso, UPM-Kymmene, M-Real, and Myllykoski). Of the large producers Ahlström and Nokia changed the centre of gravity in their production to other areas (Ahlström to special paper products, Nokia to telecommunications). In Sweden the rapid consolidation process started in 1978 within the Wallenberg group by a merger between Uddeholm and Billerud. Over a period of ten years six large domestic actors were merged with either MoDo or Stora (later Stora-Enso). This domestic process was followed by a number of international acquisitions. In 1987-1990 the Swedish industry acquired 26 companies in Western Europe (Melander, 1997). The result of this process was that the Swedish industry was dominated by three large actors, SCA, Stora and MoDo. Also, the U.S. based firms consolidated through mergers and acquisitions, especially in the late 1990s and in the first years of new millennia, though there was

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generally a higher degree of concentration, by product line, in the European industry than there was in the North American industry (Artto, 2001; Rowland, 1999). Especially since 1999, mergers and acquisitions in the North American pulp and paper industry have substantially increased d concentration of market share for the producers of many grades. Certain individual acquisitions, like Georgia Pacific’s acquisition of Fort James in 2000, and International Paper’s acquisition of Champion in 2000 increased the concentration rate significantly. Especially within newsprint there has been significant increase in market concentration. This is natural as newsprint was and still is a slowly growing line of business in which concentration is more typical than in the businesses where new capacity continues to be built. Again, certain particular mergers alone explain a major part of the development. For example, Abitibi-Consolidated increased its newsprint market share from around 20 per cent in 1999 to over 35 per cent after acquiring Donohue (Rowland, 1999; Takacs, 2001). One outcome of the high investment rate within the Nordic companies has been slow capital turnover, especially during the 1980s and 1990s (Artto, 1995). According to Diesen (1998) the Nordic companies have sought best possible profits by having high investment rates. However, at the same time the high interest charges have diminished net profits. This can also be detected from the debt ratios (Figure 11.3). Within the Nordic companies the annual debts exceeded turnover constantly, whilst the indebtedness was much more moderate within the U.S. firms. Here, however, the differences in bookkeeping might explain most of the differences from the period before mid-1970s as the Scandinavian firms attempted to avoid taxes via not showing profits. Furthermore, there are significant differences within the level of interest expenses between the countries throughout the period. Both in Finland and in Sweden the cost of debt capital accelerated in the early 1990s (Artto, 2001; Melander, in this volume). This alone can explain the high debt ratio within the Nordic companies in the early 1990s in Figure 11.3. 140 120 100 80 60 40 20

19 45 19 49 19 53 19 57 19 61 19 65 19 69 19 73 19 77 19 81 19 85 19 89 19 93 19 97 20 01

0

Nordic

US

Sources: Annual Reports.

Figure 11.3. Average debt ratio: credit capital from turnover, r per cent, 1945 – 2003.

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The overall capital turnover within the case companies was rather low as within the optimal production processes even 4 – 5 month t capital turnover can be received. In the case of the forest industry companies this rate has been seemingly lower: as an average the capital turnover within the case companies in 1945 – 2003 was around 14 months. The capital turnover of the Nordic companies was around 15 to 16 months during the whole period, whilst within the U.S. companies it was around 13 months. As Figure 11.4 illustrates, the capital turnover was much quicker in the U.S. based companies throughout the 1970s, 1980s, and 1990s, though also with U.S. firms the capital turnover lowered down during the whole period. During that period the average capital turnover with U.S. companies was around 12 to 14 months, whilst with Nordic companies it was around 17 months. In certain peak years the turnover was as slow as 22 months (1991 and 1992) with the Nordic companies. Thus, the turnover was almost two years – in ffact, over two years turnover was actually reached both by Kymmene and Enso at the time. Thereafter the Nordic companies have improved their turnover rapidly, so that as an average 13 months turnover was reached by the early 21stt century. 25 20 15 10

19 50 19 53 19 56 19 59 19 62 19 65 19 68 19 71 19 74 19 77 19 80 19 83 19 86 19 89 19 92 19 95 19 98 20 01

5

Nordic

US

Sources: Annual Reports.

Figure 11.4. Capital turnover in months 1945 – 2003.

1.2 Productivity and profitability Investments in new and modern production technology show up especially within the productivity increase in the case companies. The capital turnover with the Nordic companies was low, and related to that, also the profitability. However, the productivity grew much faster within the Nordic companies than in the U.S. based firms (Figure 11.5). Still from the 1950s up to the early 1990s the U.S. companies clearly outperformed Nordic companies with regards to productivity. However, this

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pattern changed during the late 1990s as the Nordic companies surpassed their U.S. based competitors in terms of productivity. The whole forest industry sector experienced a time of diminishing returns throughout the post war era (Figure 11.6), which has in its part lead to a need to improve productivity (Figure 11.5). This is clearly seen especially in the case of U.S. based firms, which produced fairly good return on invested capital at the turn of the 1950s, but have declined ever since in trend-like fashion (see Ahola, in this volume). Between 1974 and the end of 2000 the paper and pulp industry underperformed with regards to the overall European market, according to a study by analysts at Merrill Lynch, by 914 per cent. The major reason for the bad returns was, according to analysts, the cyclicality in the price of pulp (Economist, 2001). Another study argues that the U.S. paper and pulp industry companies underperformed in the S&P 500 list throughout the 1980s and 1990s. Dravo (1996) suggests that the reason was the strategic logic and behaviour within the paper industry companies. Namely, as soon as profits started to return, papermakers added more capacity than was warranted for the growth of the markets they serve (Dravo, 1996). Also, a study by Farimani, Buongiorno, and Thompson (1988) suggests that the demand shifts were the most important determinants for investment in the (U.S.) paper industry between 1964 – 1983, whilst capital costs did not play a significant role. 0.35 0.30 0.25 0.20 0.15 0.10 0.05

97 19

89

93 19

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85

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77 19

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69

65

61

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19

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57 19

53 19

49 19

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45

0.00

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Sources: Annual Reports. Note: Nordic companies, only Finnish firms included.

Figure 11.5 Productivity: turnover produced by one employee (2003 million dollars def.), 1945 – 2000.

Sensitiveness to economic cycles is typical of the forest industry sector on the whole. For example, the sawmill industry has faced dramatic price and demand fluctuations, which are retarded as natural and innate to the industry (Alajoutsijärvi, Holma, Nyberg, & Tikkanen, 2005). This is also the case with the paper and pulp industry. During the boom the utilization of capacity grows resulting in high return

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on invested capital. However, during the recessions capacity goes down as do the profits (Artto, 2001; Berends & Romme, 2001; Melander, 1997). Fluctuations in demand and raw material prices are considered as the major external causes for the cyclicality in the forest industries (Alajoutsijärvi et al., 2005; Diesen, 1998; Melander, 1997). On the other hand, overcapacity is generally blamed as the cause for slumps in the pulp and paper industry (Berends & Romme, 2001). Shareholder value, typical for the North t American companies, was stressed in the Nordic companies only from the early 1990s on. High profitability was not, thus, a key issue for the Nordic companies e.g. in the 1970s as it was for the U.S. based firms – though, also U.S. paper industry companies have had problems in delivering shareholder value in terms of good profits (Higham, 1999). Especially from the 1950s up to the 1970s the profits of the Nordic companies were clearly under the level of their U.S. competitors (Figure 11.6). Again, it was not until the 1990s and first years of the 21stt century that Nordic firms clearly surpassed U.S. companies in terms of profitability. It was then, according to Siitonen (2003), that the paper and pulp industry made a strong effort to improve overall profitability. According to Artto (2001), the poor performance produced by the North American companies was related to the ineffectiveness of production, though U.S. based firms succeeded in solving these problems better than Canadian firms. Certain boom years can be detected from the 1990s; first, 1995 when incomes accelerated and, secondly in 1997 when especially Finnish paper industry companies obtained substantial other incomes (Artto, 2001; Siitonen, 2003). 30.00 25.00 20.00 15.00 10.00 5.00 0.00

19 45 19 49 19 53 19 57 19 61 19 65 19 69 19 73 19 77 19 81 19 85 19 89 19 93 19 97 20 01

-5.00

Nordic

US

Sources: Annual Reports.

Figure 11.6. Profitability: return on invested capital (per cent), 1945 – 2003.

The fact that more emphasis was put on profitability within the Nordic companies during the 1990s was related, among other things, to the changes in the ownership structure. State owned companies like Enso were restructured into being publicly owned, as was partly the case with certain co-operative companies (like Metsäliitto).

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Also the changes in exchange rates may explain the changed attitudes towards profitability. Namely, as Nordic companies paid their costs in kronas and markkas, but the incomes were mainly in Dollars. The introduction of Euro in Finland changed this pattern, though already in early 1990s in both Finland and in Sweden the currency was tied to the European currency system. Though expectations were high when, for example, Nordic forest industry companies were listed on the New York Stock Exchange, the results were not promising. Since the 1970s paper and pulp companies’ share prices have underperformed many other sectors. The investors unwillingness to channel money into the forest industry sector has been explained by the poor industry outlook and cyclicality, overcapacity, the industry’s poor value creation record, unimaginative management, low concentration rate contrasted to high level of diversification, and inherent nature of commodity products (Economist, 2001; Siitonen, 2003). Why, then, has the profitability of the forestry industry declined throughout the post war period? Based on the analysis above at least eight factors can explain the decreasing profitability in the forest industry in the post war period. Firstly, the rising capital costs due to the high investment rates ate into profitability. Secondly, also other costs increased, especially the price of raw material and labour costs. Still, however, the labour costs in a modern newsprint mill with modern paper machines at full production are around 14 per cent of total costs, whilst raw materials represent around 24 per cent. The same figures are in a softwood chemical pulp mill only three per cent for labour, and 31 per cent for wood respectively. (Diesen, 1998). Thirdly, the concentration process itself has been capital intensive. Simply, it takes time to reorganise all the acquired mills into the most efficient order, thus it might be the case that even the profitability will recover in future. Again, on the other hand, most of the consolidation process in the Nordic companies occurred already in the 1990s – still, by 2005 no recovery has taken place. Fourthly, the intense competition within the industry diminishes the returns. The competition is not, as stated above, only due to the big players, but also a large number of relatively small scale producers have had an important impact on the markets. The small players have the incentive to keep their machines running to the fullest, which worsens as the overcapacity and price situation on the market slows. In contrast, in the 1990s the large players have gradually learned to deal with lean periods, by taking downtime, at their mills at times of slow demand, and especially at the turn of the millennium the North American producers permanently removed a lot of excess capacity from the markets by closing some less profitable mills. Fifthly, if it would be possible to tear the earlier profits a part, one might find that in many years the profits were not, in fact, gained from the forest industry sector but rather from the diversified structures. For example, UPM-Kymmene gained reasonable profits in the late 1990s by selling the Nokia shares the company owned. Thus, concentration on the core businesses has, in at least some part, been harmful to overall profitability. Sixthly, as stated before, Nordic companies were not as eager to promote shareholder value in the 1970s and 1980s – the peculiar ownership structures and taxation policies were the main reason behind this. However, this can not explain the reason for the low profits in the 1990s. Seventhly, the paper markets have been dominated by the buyers in the late 20th century. This seems to be natural

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in a situation in which the traditional Western markets grew only gradually but in which the producers chronically obtained over-capacity. The eighth reason is that in addition to the rising costs, the real prices of many forest industry products have often been diminishing. For example, between 1982 and 1999 the paper and board prices decreased by 16 per cent in North America in real terms (Pohjakallio, 2000). Since the markets are open, the development has been similar globally. 2 STRATEGY ANALYSIS Continuing on from earlier results of, for example, Artto (1995, 2001) and Siitonen (2003), we can conclude that there were noticeable differences in the economic performance and logic of the Nordic and U.S. firms. In this section, we aim to approach the question on how these differences emerged from the perspective of the strategic actions undertaken. Table 11.6. Number of actions per period. Period Period 1 Period 2 Period 3 Period 4 Total

U.S. 238 258 670 502 1668

Nordic 195 97 263 397 952

All companies 433 355 933 899 2620

Source: The database available at: http://www.cc.jyu.fi/~jaojala/.

U.S. based companies were more active in terms of number of actions per year (Tables 11.6 – 11.8). This, however, is more related to the size of these companies (Figure 11.7). According to the figure 11.7, the activity of U.S. based firms reached it’s highest level already during period 3 (1961–1980), as there was still a rapid growth in demand for paper products in U.S. markets. Also, U.S. firms were particularly active in acquiring relatively small scale companies, paper merchants, and production facilities, as well as converting units. In contrast, from the 1980s on especially marketing channels were already established, and companies concentrated on more valuable acquisitions and mergers. Furthermore, it seems that U.S. based firms as a whole produced more small scale actions than their Nordic competitors. The fact that Nordic companies carried out more joint ventures within their strategic actions (Table 11.8) is not surprising. On the contrary, cooperative capitalism was a typical feature for the Nordic industries throughout the 20th century. This can be clearly detected especially in the case off sales associations, though also other kind of cooperation existed e.g. in raw material acquisition and in industrial policies (Heikkinen, 2000; Skippari, Ojala, & Lamberg, 2005). Associations of foreign interest groups are sometimes called “spider webs” (Siitonen, 2003) which does not really describe the Nordic marketing associations. On the other hand, the foreign direct investments carried out by Nordic companies through joint ventures can be characterised as these types of webs. In the case of the paper and pulp, international joint ventures were usually targeted to new markets,

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Average sales (mil. 2003 US Dollars)

but also to obtain new raw material/resource bases, as was the case in the 1990s in South-America and the Far East (NY-Times, 1999). Also, there are examples of joint ventures between state and companies (Guest & Singleton, 1999). 14000

US 4

12000 10000 8000 US 3

6000 Nordic 4

4000 2000

US 2 Nordic 3

Nordic 2

0 0

5

10

15

20

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35

Actions per year Figure 11.7. Average sales (def. 2003 mil. U.S. Dollars) and average number of actions/ year, Nordic and U.S. Companies. Table 11.7. Average annual number of actions (actions/year in a period). Period Period 1 Period 2 Period 3 Period 4 Total

U.S. 2.4 18.4 35.3 22.8 10.6

Nordic All companies 2.1 4.4 6.9 25.4 13.8 49.1 20.9 40.9 6.4 16.7

Source: See Table 11.6.

Table 11.8. The share of joint ventures from all strategic actions per period (per cent). Period Period 1 Period 2 Period 3 Period 4 Total

U.S. 7 7 7 8 7

Source: See Table 11.6.

Nordic All companies 14 10 12 8 10 8 10 9 11 9

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2.1 Integrating forwards in the production chain Vertical and horizontal integration together with related and unrelated diversification have been typical for the forest industries throughout the period in question. Vertical integration and related diversification was a typical feature within the paper and pulp industries up to the mid-20th century (Ohanian, 1994), and unrelated diversification up to the 1980s, whilst during the past few decades the companies have sought growth especially through horizontal integration, namely, by concentrating on the core business activities. Accordingly, horizontal mergers were the dominant mode in paper and pulp industries during the 1980s and 1990s. Companies sought especially costs savings, better profitability and higher growth rates through horizontal integration instead of diversification strategies (Siitonen, 2003). Table 11.9. Strategic actions in the value chain, all case companies. Percentage of strategic actions per period.

1. Raw materials (timberland etc.) 2. Sawmills 3. Pulp (mechanical and chemical) 4. Paper 5. Paperboard 6. Panel, plywood, veneer 7. Paper and board converting 8. Marketing and distribution 9. Other related 10. Multiple categories 11. Unrelated business Total

Period 1 Period 2 Period 3 Period 4 Total N 7 10 5 5 6 153 13 8 10 7 9 238 9 7 6 3 6 146 19 8 11 13 13 330 6 6 4 5 5 125 4 9 8 6 7 185 6 19 19 15 16 406 5 9 9 5 7 183 4 5 3 1 3 72 11 12 8 14 11 294 16 6 18 23 18 467 100 100 100 100 100 2599

Source: See Table 11.6.

Vertical integration forwards within the production chain was a typical feature within the Nordic companies during the late 19th century and first half of the 20th century – and for some companies even during the post war period. Even at the end of the 20th century most of the case companies had remarkable vertical integration – most often in the form of having both pulp and paper production within the same company. Furthermore, a number of companies were also engaged in product producing (category 7 in the Tables), like United Paper Mills with laminate, SCA and Weyerhaeuser with packaging. Especially, in the Nordic companies the centre of gravity has moved from raw material and semi-finished production (sawmills and pulp) towards finished products such as paper (Table 11.11 and 11.13). Vertical integration backwards, for example, to the raw material base was perhaps more typical during the latter part of the 19th century and early 20th century than during the post war era. Typically, Finnish forest industry companies acquired large forest areas by the beginning of the 20th century, but since this was prohibited by law owning ones own forests was no longer so important in strategic actions. In

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Sweden, companies could supply in the 1990s even 50 per cent of the raw material from their own forests, whilst the same figure with the Finnish companies was only ten per cent. However, integrating backwards in the production chain has again gained more importance since the 1970s when the companies have sought the possibilities to use fast growing fibre (like acacia and eucalyptus) as raw material (Siitonen, 2003). The forest plantations in the Far East and South America have been among the central issues, for example, in the forest industry companies’ strategies from the late 1990s on, whilst at the same time the companies have sold their domestic forests. By the early 21stt century, the timber plantations already supplied an estimated 27 per cent of the world’s industrial round-wood, and there was potential to produce much more. Whilst the typical rotation in years with Nordic softwood is around 60 to 100 years, the same figure is with South American eucalyptus plantations around 5 to 10 years (Iivonen, 2005; Tomberlin & Buongiorno, 2001). Vertical integration was a part of related diversification that occurred within the forest industries throughout the period. Though the share of related actions was reasonably low (Tables 11.9 – 11.11) their importance especially for the Nordic companies was crucial. The related diversification gave birth to the forest cluster in both Sweden and in Finland. Namely, companies like Ahlström, Tampella, RaumaRepola, SCA, and United Paper Mills started to produce machinery for their own usage, and later on, this machine industry developed into its own branches and industries (Hazley, 2000; Jääskeläinen, 2001; Lammi, 2000a, 2000c; Sölvell et al, 1991). As Davis et al (1994) argue, a diversified firm composed of several unrelated businesses, was a dominant corporate form in the United States during the 1980s and before. Still, by the turn of the 1980s and 1990s this form of business structure was deinstitutionalized, and by 1990 the largest industrial firms in the United States became considerably less diversified (Davis, Diekmann, & Tinsley, 1994). The same occurred in the European forest industry companies. The forest industry companies concentrated on the core businesses from the 1980s onwards, whilst still in the 1970s diversification was a more pronounced strategy. During the 1960s and 1970s forest industry firms diversified into several unrelated sectors, such as the shipping business (Enso), information gathering system Lexis/Nexis (Mead), Petrochemistry (Kymmene, Georgia-Pacific), to name a few. The number of unrelated strategic actions was, though, still high even in the last period, composing almost one fifth of all actions made by the case companies (Table 11.9). This, in fact, is related to the divesting unrelated businesses, thus, the share refers mainly to actions that ended diversified businesses. The concentration on the traditional core business activities did not only mean divestments of the (unrelated) diversified businesses, but in some cases even closing some branches in paper production. For example, MoDo spun of newsprint and magazine papers to a new company (Holmen) in 1999, Metsäliitto divested tissue papers (1997) and Ahlström all other but the special papers – as can be detected from the case articles in this volume (see also Siitonen, 2003). Also American companies have divested paper production. For example, in 2005 International Paper

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divested its uncoated fine papers and MeadWestvaco concentrated on packaging by divesting its papers business. Table 11.10. Strategic actions in the value chain, U.S. companies. Percentage of strategic actions per period.

1. Raw materials (timberland etc.) 2. Sawmills 3. Pulp (mechanical and chemical) 4. Paper 5. Paperboard 6. Panel, plywood, veneer 7. Paper and board converting 8. Marketing and distribution 9. Other related 10. Multiple categories 11. Unrelated business Total

Period 1 Period 2 Period 3 Period 4 11 12 4 7 6 7 10 8 6 3 4 2 23 8 8 9 9 5 3 5 1 9 10 8 11 26 22 17 7 12 8 5 6 5 3 2 13 11 9 14 7 2 19 22 100 100 100 100

Total 7 8 4 10 5 8 19 8 4 11 15 100

Source: See Table 11.6.

Table 11.11. Strategic actions in the value chain, Nordic companies. Percentage of strategic actions per period.

1. Raw materials (timberland etc.) 2. Sawmills 3. Pulp (mechanical and chemical) 4. Paper 5. Paperboard 6. Panel, plywood, veneer 7. Paper and board converting 8. Marketing and distribution 9. Other related 10. Multiple categories 11. Unrelated business Total

Period 1 Period 2 Period 3 Period 4 3 6 5 2 22 10 8 6 12 18 10 5 13 8 19 19 2 8 6 4 8 9 5 3 0 3 11 13 3 2 9 6 2 2 2 1 9 15 7 15 26 18 17 26 100 100 100 100

Total 3 11 9 17 4 6 9 6 1 11 23 100

Source: See Table 11.6.

2.2 Growing through mergers and acquisitions The organic growth through investments (Figure 11.2) does not alone explain the growth of the Nordic and U.S. companies. Mergers and acquisitions also played a significant role (Tables 11.12 and 11.13). Only in the packaging sector did about 900 company mergers and acquisitions take place in Europe during the years 1991 – 1998 (Higham, 1998). Mergers and acquisitions have lead to growing consolidation within the industry, though there are significant differences between geographical

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areas and also in the lines of production. For example, in 1999 the top five companies made up 35 per cent of total production of newsprint, 35 per cent of uncoated papers, 50 per cent of coated mechanical papers, and around 40 to 45 per cent in market pulp (Rowland, 1999). Despite several bouts of consolidation, there were still almost 2000 paper companies in the world in 2000, as stated in the introduction (Table 1.1). Many of them are small and medium-sized family firms, which have made it hard for bigger groups to avoid price wars when demand for paper has fallen (Economist, 2001). Overall, the forest industry is not as concentrated as many other manufacturing industries, as stated already in the introduction. In Japan, for example, there were in 1995 altogether 275 pulp and paper manufacturing companies, and at the beginning of the 21stt century Italy alone had around 200 privately owned paper makers (Economist, 2001; Noda, 2003). Table 11.12. Growth through mergers and acquisitions within the case companies; per cent share of acquire actions from all strategic actions. Period Period 1 Period 2 Period 3 Period 4 Total

Nordic 26 25 33 45 36

U.S. All companies 34 30 39 35 35 35 33 38 35 35

Source: See Table 11.6.

As already stated above, horizontal integration gained more importance within the actions by the companies during the 1980s and 1990s. Mergers and acquisitions were carried out mainly to gain operational synergies, to open new market areas, to save raw material resources, to rationalize transport costs, to lower the general administrative together with R&D expenses, to gain a better bargaining position in dealing with the suppliers or, as Siitonen (2003) states, due to defensive reasons. Namely, fewer than five per cent of the mergers, acquisitions and joint ventures in the paper and pulp industry are driven, according to her, by organic growth, whilst 95 per cent are made for defensive reasons. For example, North American companies have sought to beat the challenges of imports from the low cost regions like South America by establishing new market positions in these areas through mergers (Siitonen, 2003). Also, intense rivalry is a reason for the growing importance of acquisitions. “If you are not the acquirer, you are going to be acquired”, as Siitonen (2003) refers to one of her interviewee from the paper and pulp industry. Historically the American (U.S.) and UK companies have been more M&A intensive than the companies from Japan or from the EC area. Also within the paper and pulp industries, U.S. based companies have led the concentration process before the 1980s (Table 11.12). As Siitonen (2003) suggests, the reasons for this were more matured markets and early emphasis on the shareholder value through concentration synergies. However, especially during the last period Nordic companies have sought growth through mergers and acquisition, which can be detected from the strategic

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actions carried out by the case companies (Table 11.12). Organic growth through investments seem to have lost its relative position to acquisitions in the strategic behaviour both in case of U.S. and Nordic based firms. Also, companies within other areas have been merger intensive in the 1990s, the most notable once being in South-Africa (Mondi and Sappi) and in Japan, where in 1993 two huge companies (Nippon Paper Industries and New Oji Paper Company) were created through mergers (Noda, 2003; Serfontein, 2001). Table 11.13. Organic growth within the case companies; per cent share of build actions from all strategic actions. Period Period 1 Period 2 Period 3 Period 4 Total

Nordic 59 63 47 26 42

U.S. All companies 52 55 56 58 51 50 27 26 45 44

Source: See Table 11.6.

Closing actions, either through selling out or closing production (Tables 11.14 and 11.15) gained more importance only during the last period. This is related to dismantling the diversified structures of the companies, when a number of units were either sold or closed down when companies concentrated to core competences. Also, at the same time old and unproductive mills were closed down (Barnett & Grier, 1996; Gagne, 1995). For example, Kymmene divested diversified lines of businesses in just a couple of years in late 1980s and United Paper Mills already in the 1970s. In North-America, a number of companies adjusted their lines of businesses at the turn of the 1990s. For example, Kimberly-Clark sold its pulp and newsprint businesses in Alabama and Ontario for global expansion of consumer products (Narisetti, 1994). The dicontinuation of activities of the companies in the traditional markets seems to be an obvious consequence of the slowing demand visà-vis the higher expectations, for example, in China and India. Table 11.14. Selling out the production capacity; per cent share of selling actions from all strategic actions. Period Period 1 Period 2 Period 3 Period 4 Total

Nordic 2 0 8 22 12

Source: See Table 11.6.

U.S. All companies 6 4 3 2 8 8 22 22 11 11

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Table 11.15. Divesting production; per cent share of closure actions from all strategic actions. Period Period 1 Period 2 Period 3 Period 4 Total

Nordic .. 11 12 8 10

U.S. All companies 9 11 2 4 5 7 19 14 9 10

Source: See Table 11.6.

2.3 Internationalizing production The forest industry companies have remained by and large within certain geographical domains (Sajasalo, 2003). The level of globalisation in the paper and pulp industry was in the 1990s among the lowest within the manufacturing industries: the top five companies had, for example, in 1998 less than 15 per cent of the world capacity, whilst the level was for example within the automobile or airline industries around 55 to 65 per cent. The reason for the low level of globalisation is foremost the local raw material base, high capital costs, constant growth of the regional businesses, and also institutional environment in which it originated (Laurila & Ropponen, 2003; Siitonen, 2003). Still, at the same time globalisation has accelerated also within the forest industries due to the reasonable low transport costs, and the diminishing barriers of trade (Rytkönen, 2000). Table 11.16. Per cent share of international actions from all strategic action. Period Period 1 Period 2 Period 3 Period 4 Total

Nordic 3 11 33 37 26

U.S. All companies 1 2 4 6 11 17 13 23 9 15

Source: See Table 11.6.

Depending on how internationalisation and globalisation is determined, the case companies can be seen as international, but only moderately global. If we use the definition used by Siitonen (2003) where the global firm has to have production at least within three continents, and that 50 per cent or more of the production should be produced outside of one’s own continent, then none of the case companies falls in to this category. In fact, from the top-100 paper and pulp companies in the late 1990s only four can be regarded as global with this category, namely, KimberlyClark, Jefferson Smurfit, Sappi, and Fletcher Challenge Paper (Siitonen, 2003). Also the leading journal of the field, Pulp and Paper, argued in 1998 that there was no global company in the field so far – only Sappi and UPM-Kymmene were, according to the article, the closest to became ones (NY-Times, 1997; Pearson, 1998).

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The Nordic companies have been far more active in their internationalisation strategies than their U.S. based competitors (Table 11.16). This is natural, since the markets for the Nordic producers have traditionally been abroad for obvious reasons. For the Nordic companies the smallness of domestic markets has been the major motive for internationalisation. Still, also certain U.S. companies have been active in international operations. For example, IP and Champion had in the 1990s significant operations outside the North America: IP in Eastern Europe and the Pacific and Champion in South America. North American and Japanese companies are aiming, according to Siitonen, via the internationalisation strategies especially to protect their home markets with “counter attacks” (Siitonen, 2003). 3 DISCUSSION It is paramount importance to explain the causes and consequences of such a largescale evolutionary process that we have focused on in this book. Most probably, there exists no single explanation for the historical development or easy-fix normative perspective for future competition. In the following we will concentrate on continuing discussion about the nature of competition in the industry and then to list possible explanations for the resulted differences and similarities of the strategic actions and performance of the studied companies which also may tell something about the historical trends and future prospects of the whole industry. 3.1 The Nature of Competition At the beginning, Figure 1.2 listed the degrees of competitive rivalry inside the industry boundaries. The four dimensions of competition were, following Chen (1996), Downstream Rivalry, Intensive Rivalry, High Independency, and Upstream Rivalry. An obvious expectation was that the competition has intensified in the forest industry in terms off overlap in product and resource market at the same pace with globalization of the world markets. Open competition between Nordic and U.S. based firms in the product markets has seriously occurred only from the early 1970s on, when the first Nordic companies made attempts to sell their products to North America and even established production plants overseas. U.S. firms, however, were active in Europe already in the 1950—1960s after reaching a cost-advantage by turning to producing sulphate pulp from southern pine. Still, around 79 per cent of the Finnish forest industry exports went to Europe in 1999, whilst U.S. producers produced mainly for domestic usage. In a way an obvious state as one third of the global paper consumption occurs in North-America – the second largest markets being in Europe and third largest in Asia, especially in Japan (Key, 2000; Noda, 2003). From the perspective of the resource overlap, the competition within the raw material markets has been up to now not important between international competitors. However, as Näsi and Sajasalo (in this volume) vividly illustrate from a Finnish perspective, there has been intense domestic competition for the raw materials both in U.S. and Nordic countries. Having an adequate raw material base

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has been a major determinant for enabling the forest industries to emerge in Nordic and North American countries. For example, Finland has an average of 4.6 hectares of forest land per head of population (Key, 2000). The nearness of a local raw material base is a central issue for the low globalisation rate within the forest industries (Diesen, 1998; Siitonen, 2003). Still, there are global examples in which the bulk of the raw materials are imported, as is the case with the Japanese paper industries (Iwamoto, 2003; Noda, 2003). In the whole cost structure of the paper and pulp industries the raw material does not play as significant role as, for example, in the small scale saw mill companies (Alajoutsijärvi et al., 2005; Lammi, 2000b). As an example of the importance of raw material supplies, however, one can mention the pulp production facilities that the Nordic companies constructed in South America in the early 21stt century: the pulp was meant to be used in the Nordic paper plants, in the Nordic companies’ Chinese plants, and sold on the European pulp markets (Iivonen, 2005a, 2005b). Therefore, even the significant transport costs from South America to Scandinavia did not play a role compared to the cheap and quick growing time of the forests in the Southern hemisphere (Tomberlin & Buongiorno, 2001). On the other hand, availability of a cheap and sustainable fibre source is essential to feed the Chinese paper mills, since China does not have adequate domestic forest assets. Furthermore, there are significant differences in the raw material consumption within the different paper grades. Newsprint, for example, is using more and more recycled paper as raw material, whilst printing and writing papers are still produced from the wood fibre (Seppälä & Seppälä, 2000). In the mid-1990s around 55 per cent of raw materials were still wood based, whilst recycled fibre represented 30 per cent, and other raw materials (such as minerals, chemicals, and non-wood fibre) 15 per cent (Diesen, 1998). Overall, the competition within the raw material market (Upstream Rivalry) has been moderate yet the periods of fast growth (1920—1950s in U.S.; 1950—1970s in Scandinavia; see Näsi & Sajasalo in this volume) clearly intensified the debates over the round-wood supply. For example, in Finland and Sweden the concern for the raw material supply was one of the most important strategic issues in the 1960— 1970s (Melander, 2005; Laurila & Lamberg, 2004). Similarly, in the product market we simply cannot identify serious intensive competition in the manner it exists, for example, in the airline industry. However, as Siitonen (2003) has noted this tranquillity may be changing towards more aggressive defensive and proactive moves on the global scale. What then, could explain the gradually developing nature of the industry and the simultaneous lack of intensive short-term inter-firm competitive dynamics? The first, obvious, explanation is that until the 1980s the market for forest industry products was almost constantly growing. For example, in the mid-1990s the average consumption of paper was in the EU countries around 160 kilograms, whilst it was in the Eastern European countries still around 37 kilos. However, around 2000 the per capita paper consumption was in Sweden 305 kg/year and in United States 295, and in Japan 285 kg/year, whilst it was only around 25 kg in Bolivia (Molina, 2001; Noda, 2003). Still, even in the EU countries, Japan, and in North America the demand for paper products was still growing in the early 21stt century (Noda, 2003; Rytkönen, 2000). In this kind of a situation, different companies were able to

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prosper without a need for dynamics outside the firm boundaries. It is, indeed, characteristics that the majority of the identified strategic actions seem to have followed patterns that were primarily conducted from the premises of the firms’ own historical experiences and specific opportunities. The second explanation for the lack of inter-firm rivalry has been the focus on the business-to-business markets. As the products typically have to suit rather standard technical requirements of printing houses, building companies and packaging firms, pricing has been one of the rare possibilities to make a difference vis-à-vis the competitors. However, the contracts between the supplier and the customer are bilateral which means that open price-wars or action-reaction dyads rarely become visible in the industry. This does not mean that the industry is not competitive. On the contrary if we look back at the scale of the rare competitive battles within the industry. The companies (IP and Stora-Enso) race to acquire Champion in 2000, attempts to invade the market in China or the Nordic conquest of the German forest industry companies in the 1980s and 1990s illustrates that serious competition exists but not in the sense of that conveyed in the competitive dynamics literature (see e.g. Chen 1996). In a way, if, for example, the airline industry with its intense rivalry could be thought as a full-scale war, the forest industry has been for the last century in a cold-war-like situation with an accumulating threat of open conflict which has not yet been realized. So, the firms have expanded both geographically and in terms of scale and scope but avoided war-settings at a tactical level. 3.2 The Repertoire and Sequence of Strategic Actions If the main emphasis of the strategic actions was in the firm-specific development, the next obvious question is what is the repertoire and sequence of those actions. The main message here and through the whole book is the striking similarity of strategy logic over time. Table 11.17. Average annual growth of sales per period (percent) and the typical growth strategies. Period Period 1 Period 2 Period 3 Period 4 Total

Nordic .. 9.2 5.9 9.5 8.1

U.S. Together Typical growth strategy .. .. Organic growth 9.8 8.5 Vertical integration 6.0 5.9 Diversification 3.5 6.0 Mergers and acquisitions; geographical expansion 6.0 6.7

Table 11.17 concludes the findings that the case histories already demonstrated. First, during the last century the U.S. firms were first-comers in terms of growth whereas the Nordic case companies continued their expansion through the period. Second, the big overall picture is that all companies followed a similar pattern of growth strategies over the study period. During the first period, growth resulted from green-field investments, followed by vertical integration in the 1940—1960s,

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diversification in the 1960—1970s and finally the phase of M&As and geographical expansion during the last period. These were the dominant logics, which does not mean that other logics would not have existed. However, it is important to notice that these dominant logics occurred in sequential order in all companies not manifesting in any serious national differences. In the context of this book, we can offer at least two explanations. The first one derives from the path dependence principle that was introduced as the underpinning idea for the study project. Historically, it is no wonder that such similarity has shaped the industry evolution. During the early period of the industry, the U.S. firms created a model that was imitated by the Nordic companies. This is documented in the various firm histories and, for example in Anders Melander’s (1997) doctoral thesis, and derived from the fact (Toivanen, 2004) that all the most important technical and business innovations originated from the U.S.-based companies before the 1960s. After the 1950s when the competitive advantage was no longer brought about through technical innovations but rather from solutions regarding scale and scope (Toivanen, 2004; Chandler, 1990) and process innovations the creation of the industry logic was distributed among the U.S. and Nordic companies. At this stage, the similarity resulted from the cognitive constraints of the organizational actors which in turn were a direct result of the historical experiences (see Sajasalo, in this volume). Moreover, after the imprinting moments in the early 20th century, the sunkcosts tied to the machinery and plants already made it practically impossible to change the direction of the entire industry or even of particular companies. The diversification wave of the 1970s was clearly an attempt to change the basic determinants of the industry although turning to be futile and impossible. Second, the constraints in strategizing were not only results of the historical dependencies or imitation (see Näsi and Sajasalo, in this volume). On the contrary, all the major changes were caused by radical changes in the surrounding socioeconomic environment. Thus, it is no wonder that the sequence of strategy logic more or less follows the Chandlerian sequence of growth strategies (Chandler, 1990; Cantwell, 1989). For example, urbanization and changed consumption and distribution habits created demand for packaging products and the slowing demand motivated to seek growth from unrelated businesses or from distant new market areas such as China or Latin America in the 1990s. Another incentive for globalization at least to the packaging converting producers came from the move of their customers in other manufacturing industries into the lower cost countries, because it was infeasible to transport some light packaging products over long distances Thus, we may state that the strategy logic has been strongly dependent on history and market environment resulting in few ‘strategic innovations’ and consequent similarity in the repertoire of growth strategies. It is obvious that the industry has not yet faced such changes that McGahan (2004) sees necessary for radical rupture in the evolution of industries, namely changes in the basic technology (for example the substitution of wood as the principal raw material) or in the market channel (for example a radical marginalization of print media).

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3.3 National differences On the surface level, the evolution of strategies seems uniform and nicely sequenced taking into consideration the fact that we had companies from three countries and with different historical backgrounds. As the comparisons have already highlighted, however, we found national differences as well. Surely, some of the differences in economic performance can be explained purely by operational level factors manifested in machinery and craftsmanship. The national background is highlighted also in the strategy level if we move deeper from the surface level growth strategies. Table 11.18. Centre of gravity in production chain – two most important strategies per period (per cent shares in parenthesis). Period Nordic Period 2 Diversification (19.6) and Downstream (16.5) Period 3 Midstream (24.6) and Downstream (20.4) Period 4 Diversification (26.5) and Midstream (23.5)

U.S. Downstream (37.7) and Midstream (12.5) Downstream (30.2) and Diversification (21.8) Diversification (23.4) and Downstream (22.6)

Note: Actions are divided to upstream, midstream, downstream, and diversification strategies.

Note: upstream strategies include the actions related to raw material acquisition and semi-finished products (sawn timber & pulp), midstream strategies include actions related to finished products (paper and paperboard), downstream strategies include converted products and marketing, whilst diversification strategies include all related and unrelated diversification. f Sales deflated to U.S. 2003 dollar values.

Figure 11.8. Upstream, midstream, downstream, and diversification strategies by U.S. and Nordic companies in 1946 – 2003 (per cent shares from all actions, left axis) and activity index (annual actions/sales, right axis) in different periods.

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Table 11.18 and Figure 11.8 illustrate that we can find substantial differences in how U.S. and Nordic companies focused their actions in the production chain. Following Galbraith (1988), we can state that the centre of gravity within the forest industry has moved from upstream strategies towards downstream strategy during the 20th century. The upstream strategies in actions are here classified as the actions related to raw material acquisition, together with the actions related to semi-finished products (pulp and sawn timber). The midstream strategies here are classified as the actions related to the production of paper and paperboard, and the downstream strategies the actions related to converting and sales. Furthermore, diversification strategies (both related and unrelated) are classified here as separate units. The downstream strategies were especially important for the U.S. based companies, though their relative shares are declining. This is related to the fact that the U.S. companies usually had more converting businesses than their Nordic competitors. This in turn, might be related to the fact that competitive legislation in the U.S. motivated firms to grow though vertical integration in order to avoid antitrust accusations (Chandler, 1990). In turn, Nordic companies stressed throughout the post war period mid-stream strategy yet downstream strategies gained more importance throughout the period. Interestingly, upstream strategies played only a minor role both in U.S. and Nordic companies when analysed in terms of numbers of actions. However, here most probably the analyses underestimate the strong role played by the raw material base. For example, both in Sweden and Finland the fear of diminishing timber in the 1960s lead to a number of reformulations in the whole industry (Kuusela, 1999; Melander, 1997). It is also important to remember that the cartels, especially, in Finland made it possible to concentrate on mid-stream strategies as these centralized associations carried the marketing responsibilities until the 1980—1990s. Related and unrelated diversification were rising both in U.S.A and Nordic countries. Here, again, within the last period the divesting of diversified structures explains the importance. However, in Nordic countries especially in the second period diversification was more pronounced than in the U.S. based companies. The important question here is obviously how and why the national context affected strategic actions in terms of the location along the production chain. The first explanation is tied to the surrounding business environment. For example, U.S. d as the societal change (e.g. firms moved earlier to downstream production urbanization and related improvement in living standards) created demand for converting products 10 – 20 years earlier than in Europe. Similarly, Finnish firms started unrelated businesses such as shipping or machine production in the 1940— 1950s as they wanted to secure smooth logistics and services by maintaining full control vis-à-vis the option to buy these services from other providers. The second explanation is the differences in the institutional context of the companies. The case studies have already reported a variety off such differences. For example, Nordic firms did not have to be active in marketing activities as the national cartels channelled the products to international market, the U.S. antitrust legislation motivated, even forced companies to avoid horizontal integration and economic policies in Sweden and Finland encouraged d late expansion of the companies. The late expansion may be the most interesting issue as the market success in the 1980—

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1990s evidently derived from the fact that in relative terms superior resources were investedin the industry by the Finnish and Swedish societies vis-à-vis the passivity of the U.S. government. It seems obvious that for decades the Nordic companies were boosted by devaluations, educational and R&D support, trade policies and by the low profit expectations of the shareholders. On the contrary, U.S. firms had to maintain their legitimacy in the capital market by adopting strategies that offered at least moderate short-term return for the invested money. What is interesting, however, is that increasingly the institutional environments have converged during the 1990s and early 21stt century which may lead to increasing similarity at all levels of strategic actions. 3.4 Evolution of Capitalist Systems: the case of the forest industry The forest industry has emerged and grown in a co-evolutionary relationship with the surrounding society and economy. Following the traditional phases of capitalistic development (Cantwell, 1989), we can argue that the forestry industries already existed during the era of merchant capitalism. In fact, the international trade with sawn timber was among the prerequisites for the Dutch, and lately British dominance in international trade. However, if we concentrate on paper and pulp industries, then the strating point for the industry was in the heart of the industrial capitalism (Table 11.19). The financial institutions or spheres (Näsi and Sajasalo, in this volume) gained more importance in USA and in both of the Nordic countries. Table 11.19. The coevolution of capitalistt system and forestry industry. Period Period 1

Period 2

Period 3

Period 4

Capitalist system

Ownership structure in forest industry Industrial and Financial Family owned companies Capitalism in Nordic Countries, Corporations emerging in USA Financial capitalism Family owned companies fading, corporations becoming dominant form in USA Fading financial Heyday for the large capitalism, emerging family owned companies global capitalism Global capitalism International ownership in large, forestry companies

Dominant form of activities in forest industry Emerging paper and pulp industries, first (domestic) consolidation waves both in USA and in Nordic countries Emerging diversification

Diversified structures in struggle Arising globalisation of production, still, regional concentration in production. Concentration to core business activities

The family firms still play an important role in the paper and pulp industries as a whole. For example, the British paper industry was dominated by the family owned

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enterprises up to the 1970s (Chandler, 1990). However, within the large producers family owned companies have lost their relative competitiviness by the 1980s. This occurred in U.S. already during the period 2, and in the Nordic countries during the last periods. As the reasons for the decline of the family owned firms one can state, among others, the limited growth capabilities which are related to the ownership structure (Ojala and Pajunen, in this volume). The international ownership in the Nordic forest industry companies occurred only in the 1990s, when the majority of, for example, Finnish paper industry companies gained also stock owners outside the domestic borders. As regards the companies mentioned in this volume, the foreign ownership in Stora-Enso in 1999 was 70 per cent, in Metsäliitto around 35 per cent, and in United Paper Mills circa 60 per cent. In Finnish case, only two companies were acquered by foreign companies, namely Nokia Paper by Fort James and Tervakoski by Tiererberg. (Lammi 2000a) Diversification emerged during the era of financial capitalism (Table 11.19). This is logical, since the financial spheres could dominate several sectors in economy, and thus, made it possible for the cooperation between several lines of businesses (Ojala, Lamberg, and Melander, 2005). Therefore, the fading of the financial capitalism and emerging globalisation removed the rationale for the diversification as the companies grew larger than the old financial institutions. The concentration to the core business activities has been, thus, thereafter the dominant form of activity at least in the largest paper and pulp industry companies. In this sense, it is logical that the next dominant form of business organization will be a multinational corporation that contains capabilities needed for global operations and competition although having roots in the traditional forest industry societies.

REFERENCES

INTERNET SOURCES Ahlstrom Corporation, http://www.ahlstrom.com Database of Paper and Pulp companies of the world compiled by the authors, http://www.cc.jyu.fi/~jaojala/ Georgia-Pacific Corporation, www.gp.com Gulf States Paper, http://www.gulf-states.com International Paper Corporation, www.internationalpaper.com Mead-Westvaco Corporation, www.meadwestvaco.com) Paperloop news service, http://www.paperloop.com. SCA Corporation, www.SCA.com Statistics of Bank of Finland, http://www.bof.fi/ Stora-Enso Corporation, www.storaenso.com U.S. Securities and Exchange Commission (http://www.sec.gov/), Company filings 1993-2004 Weyerhaeuser Corporation, www.weyerhaeuser.com

ARCHIVAL SOURCES Annual Reports: Ahlström, 1950-2004. Enso Gutzeit (Stora-Enso), 1931-2005. Finnpap, 1930-1990. Georgia-Pacific, 1948-2003. Holmen, 1950-2000. International Paper, 1908-2004. Kymmene (Kymi-Strömberg, Kymi), 1930-1995. Metsäliitto (Metsä-Serla, M-Real), 1947-2004. MoDo, 1945-1999. Nokia, 1998.

Repola, 1991-1995. Mead, 1938-2004. Mölnlycke, 1970-1975. SCA, 1950-2004. SCF 1945-1967. Schauman, 1950-1985. SCPF (Skogsindustrierna) 1968-1995. SPF, 1945-1967. United Paper Mills(UPM, Repola, Kymmene), 1950-2004. Weyerhaeuser, 1946-2003.

UMP-

Archives of Enso(-Gutzeit) Corporation, Central Business Archives of Finland (ELKA), Mikkeli (Finland) Archives of Finnish Forest Industries Federation, Helsinki (Finland) Archives of Kymmene (Kymi, KymiKymmene, Kymi-Strömberg) Corporation, Kuusankoski, Finland Archives of Tampella Corporation, Central Business Archives of Finland (ELKA), Mikkeli, Finland Finnish Official Statistics, Foreign Trade I A:2 1950 1999 Moody’s International Industry Manual 1910-1985

NEWSPAPERS Business Week Forbes Fortune Helsingin Sanomat MoDo Insikt (Modo) Pulp and Paper

Paper and Pulp International SCA tidningen (SCA) Svensk Papperstidning (selected numbers 19451990) Talouselämä

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APPENDIX

COMPETITIVE ACTIVITIES OF FORESTRY INDUSTRY FIRMS: A CODING MANUAL FOR EVENT HISTORY ANALYSIS1 JUHA-ANTTI LAMBERG Helsinki University of Technology [email protected]

JUHA LAURILA Helsinki School of Economics [email protected]

TOMI NOKELAINEN Tampere University of Technology [email protected]

1 GENERAL ISSUES The typical source data for events encompasses textual material derived from such sources as annual reports, industry calendars a or business news. Each piece of source data (hereafter “piece of information”) contains a date and a verbal passage. The date (year) indicates when the piece of information was published and the verbal passage essentially tells what the piece of information is about. The verbal passage may or may not contain an event to be recorded. The identification of events is discussed in the next section. The general objective in recording events from the data is to identify strategic actions the companies have conducted d during the period of observation. We follow here Miller and Chen (1994), who define strategic actions as “...[including] major facilities expansions, mergers and acquisitions, strategic alliances, and important 1

Author names are in alphabetical order. The work k is fully cooperative. We gratefully acknowledge the comments of Anna Ahola, Suvi Jääskeläinen and Jari Ojala.

307 Juha-Antti Lamberg, Juha Näsi, Jari Ojala, and Pasi Sajasalo (eds.), The Evolution of Competitive Strategies in Global Forestry t Industries: Comparative Perspectives, 307–312. © 2005 Springer. Printed in the Netherlands.

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new products or services [...] strategic actions involve a larger expenditure of resources, a longer time horizon, and a greater departure from the status quo than do tactical actions.” The processing procedure for each piece of information is as follows: 1. Read the piece of information (from the variety of sources) 2. Think and understand what the piece of information is about; i.e. a. is there an action identifiable? b. if there is an action identifiable, which company has conducted it and which of the actions defined below it represents? 3. If there is an action identifiable; record a. The date (year) b. The actor (i.e. the company which conducted the action) c. The numerical action code as defined below 2 THE NATURE OF THE DATA The following example illustrates the general nature of the data: 1996 Weyerhaeuser acquired 118,000 acres of forestland in Georgia. Hence this exemplary piece of information indicates that the forest company Weyerhaeuser has conducted an action in 1996 through which it has acquired 118,000 acres of forestland in the United States of America (USA), and more precisely in the state of Georgia. A certain piece of information may also contain several sentences, even though in most cases the piece of information only contains one action. However, it is possible that a piece of information contains two or more clearly distinct, independent actions. In this case the corresponding number of actions shall be recorded. The following example illustrates this: 1994 Weyerhaeuser acquired 22,000 acres of forestland in Maine and closed a sawmill in Alabama. Hence this exemplary piece of information contains two distinct, independent actions. First, in 1994 the forest company Weyerhaeuser has acquired 22,000 acres of forestland in the United States of America, and more precisely in the state of Maine. Second, in the same year (1994) the same company (Weyerhaeuser) has closed a production unit (more precisely a sawmill) a in Alabama, USA. These actions are (at least in the light of the piece of information) independent from each other and will be recorded separately, even though they appear in the same piece of information. The actions can also be independent from each other even if they are conducted in the same geographical area, orr if the geographical setting is not evident in a piece of information, iff there is no apparent evidence that the actions were mutually connected.

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However, the viewpoint in identifying and recording the actions is the one of the company conducting the actions. The following example illustrates this: 1995 Weyerhaeuser acquired 10 container plants from Westvaco. This exemplary piece of information contains an action conducted in 1995 by the forest company Weyerhaeuser through which it acquired 10 production units (container plants) from another forest company, Westvaco. Even though 10 different production units were acquired by Weyerhaeuser, this piece of information contains only one action, as the acquisitions are obviously mutually connected and were supposedly included in one contract between Weyerhaeuser and Westvaco. Not every piece of information will include an action; sometimes the precise nature of the action may not be evident in the piece of information. In the former case no action will be recorded from the piece of information, whereas in the latter case the piece of information should be unclassified and additional information should be obtained in order to understand the precise nature of the action. 3 EVENT CODES The code to be assigned for actions (events) consists of four fields. 4. The general nature of the action 5. The functional business area the action is concerned with 6. International expansion 7. Co-operation The number of code classes for each field is as follows: 1. field 4 classes (1...4) 2. field 11 classes (1...9, a...b) 3. field 2 classes (1...2) 4. field 2 classes (1...2) Therefore, a code 1821 would imply that an action has received the 1stt code (1) concerning the first field, the 8th code (8) concerning the second field, the 2ndd code (2) concerning the third field, and the 1stt code concerning the fourth field. Correspondingly a code 4b12 designates that an action has received the 4th code concerning the first field, 11th code (b) concerning the second field, 1stt code concerning the third field, and 2nd code concerning the fourth field. Thus the four-digit action code is unambiguous – with all four fields one and only one code must be assigned. Therefore, an action cannot have two or more codes

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concerning each field. Correspondingly, if a piece of information contains two or more clearly distinctive and independent actions, these actions must be treated individually and the same principles will apply to these actions. 4 DESCRIPTIONS OF THE ACTION CODES 1. Field 1: The general nature of the action. This field is concerned with the general nature of the action. There are four alternatives (1…4) as defined below. 1 Buy/acquire. A company acquires a production unit, forest land, another company or similar, or increases its ownership in it. In this case the aggregate (production) capacity of the industry does not increase or decrease. This category also contains a merger which thus is interpreted as an acquisition of the target company. The following piece off information is an example of this category: 2 Build/expand/refurbish. A company builds a new production unit, another unit or similar, or expands or refurbishes it. In this case the aggregate (production) capacity of the industry potentially increases. This category also contains an action through which the nature of the capacity of a production unit is altered, resulting in different end products, for instance. The following piece of information is an example of this category: 3 Sell/divest. A company sells a part of its operations to another company or other entity or decreases its ownership in another entity. In this case the aggregate (production) capacity does not increase or decrease. The following piece of information is an example of this category: 4 Close. A company closes its production unit, other unit or similar, so that it is not transferred into ownership of another t company or other entity. In this case the aggregate (production) capacity of the industry decreases. 2. Field 2: The functional business area the action is concerned with. This field is concerned with a business area which is affected by an action. There are 11 alternatives (1…9, a…b) as defined below. As there are several coding alternatives for this field, particular attention should be paid to the decision. Moreover, the three last codes (9, a, b) should be avoided unless it is clearly evident that one of these codes is the best choice. 1 Wood and recycled fiber resources. A company can acquire new wood resources primarily by acquiring forestland or plantations. Similarly, a company can expand its current wood resources with new plantings to existing forestland. Correspondingly, a company can decrease its timber resources by selling forestland or plantations or by withdrawing these from timber production. Similar treatment applies to logging permits. Similar principles apply to recycled fiber resources; for instance, a company can acquire new recycled fiber resources by signing a contract which permits access to recycled paper orr cardboard in a certain geographical area. Alternatively, a company can increase or decrease its timber and recycled fiber resources in the form of specialized people, machinery, production units, companies or corresponding contracts.

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2 Sawn timber and wood products. A company can increase its sawn timber and wood products operations by acquiring sawmills or related companies, or by expanding its corresponding own operations. Similarly, a company can decrease its sawn timber and wood products operations by selling or closing these. Sawn timber and wood products encompass here also products with a higher degree of processing, such as furniture and other joineries. 3 Pulp. “Pulp” or “cellulose” refers to mass which is produced chemically or mechanically. Pulp or cellulose is generally intended to be sold in the market or to be used in several paper-based products. 4 Paper production. “Paper” refers to all paper production, such as printing paper, fine paper and tissue. 5 Cardboard and containerboard production. “Cardboard” and “containerboard” refers to all such products which are not processed into ready packages and containers. The principal difference with paper production is the higher “thickness” of the product. “Sack paper” and “kraft paper” also belong to this category. 6 Sheet products. “Sheet products” refer to all wood-based sheet products that are used primarily for building purposes, such as hardboard and plywood board. 7 Packaging and converting products. “Packaging products” refer to all packaging products that are based on refining cardboard and containerboard. “Converting products”, in turn, refer to products that combine paper and different synthetic coatings and adhesives, such as stickers, decals, notebooks and wallpapers. 8 Selling and distribution. Selling and distribution is concerned with actions related to sales offices, sales companies, distribution yards and distribution companies. Marketing-related activities generally also fall under this category. 9 Other related activity. “Other related activity” refers to all other actions that are concerned with wood processing but do not fall under any of the preceding categories (1…8), such as research and development. Activities that use raw materials typical to wood processing but whose end products or customers are not typical to wood processing also fall under this category. Such activities are, for example, the production of paints, alcohols or fuel using wood-based raw materials. a Several. “Several” refers to actions that concern several of the business areas defined above simultaneously. For instance, establishing a production unit which produces several different end products (as described above) falls under this category. Typically, large-scale mergers and acquisitions are events that concern a variety of business areas. b Unrelated. “Unrelated actions” refer to such actions that are not concerned with any of the business areas defined above. In other words, the action is not concerned with typical wood processing activities but instead is concerned with such unrelated businesses as petrochemistry, construction industry or real property holding.

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3. Field 3: International expansion. This field is concerned with whether an action involves or international expansion or not. There are 2 alternatives (1, 2) as defined below. 1 International expansion. An action contains an international expansion if the action takes place or is targeted to other country than the home country of the company. 2 No international expansion. Contrary to the previous code, if the action takes place or is targeted to the home country of the company, the action contains no international expansion. Similarly, if there is no information available in the piece of information about the geographical setting of the action, it is perceived to contain no international expansion. 4. Field 4: Co-operation. This field is concerned with whether an action is conducted in co-operation with another company or other entity or not. There are two alternatives (1, 2) as defined below. 1 Co-operation. An action is conducted in co-operation (joint-venture; alliance) with another company or other entity. 2 No co-operation. Contrary to the previous code, if the piece of information does not contain any information that would indicate that an action is conducted in co-operation with another company or other entity, it is perceived to be conducted by the company alone.

INDEX

Äänekoski (place), 123 Africa, 12, 157, 161 Ahlström (company), 17, 27, 50, 89, 116, 167189, 213, 215 Ahlström, Antti (founder of Ahlström), 170, 188 Ahlström, Börje (The director of the board), 188 Ahlström Capital, 189 Ahlström, Krister, (CEO of Ahlström), 187, 188 Alabama, 36, 79, 80, 84, 197, 198, 199, 201 Almours Securities (company), 76 Amco Folding Cartons (company), 200 Argentina, 80 Arizona Chemicals (company), 35 Arkansas, 36, 71 Artificial Silk Company, 75 Asia, 12, 27, 71, 80, 81, 85, 156, 170, 210, 216, 218, 222, 224, 279 Association of the Agricultural Producers (CAAP), 123 AT-A-GLANCE, 80 Atlanta, 70 Atlantic, 63 Augusta, 68 Australasia, 11, 12, 36 Australia, 80, 84, 87 Austria, 143 Awareness, 72, 195, 196, 207, 208, 219

Caledonian Paper (company), 115 California, 71, 82, 83 Canada, 4, 32, 34, 35, 37, 70, 71, 78, 80, 82, 84, 85, 86, 87, 114, 178, 214 Caribbean, 84 Carlgren, Matts (Chairman of the board / CEO of MoDo), 144, 145, 162, 163 Carter Holt Harvey Company, 36 Case, Mike (CEO of Gulf States), 201 Castrén, Fredrik (CEO of Kymmene), 114 CeCorr, 73 Central Europe, 142, 211 Cheatham, Owen R., 68, 70 Chesapeake Corporation, 73, 88 Chile, 80 Chillicothe (place), 75, 76, 77 Chillicothe Paper Company, 77 China, 27, 85, 87, 277, 280, 281, 282 Clapp, Norton, 84, 85 Columbian Paper Company, 77 Consolidated, 45, 50 Convergence (of action, cognition), 208, 213, 217, 218, 220, 222, 223, 224 Converta (sales association), 109, 120 Corinth, New York, 32 Correll, Alston D. “Pete”, 72 Creighton, John W., 86 Crocker, Burbank & Co, 85 Crossett Company, 71 Culture, 61, 164, 165, 211, 212, 213, 215, 217, 223

Bahco AB (company), 157 Baltic Sea, 63 Bank of Finland, 50, 110, 124, 234, 235, 236, 240, 244 Bastrop Pulp & Paper Company, 36 Belgium, 78, 84, 85, 160 Bell, F. S., 83 Bellingham Plywood Company, 69 Billerud (company), 163 Björnberg, C. G., 117 Boise Cascade Corporation, 82 Braithwaite (place), 198 Brazil, 70, 71, 80, 81 Britain, 59, 69, 80, 113, 115, 143, 211 British Columbia Forest Products (BCFP), 77, 78 Brunswick Pulp & Paper (company), 72, 76, 78, 79 Buddenbrook syndrome, 189 Butler Paper (company), 73

Dakota, 83 Data Corporation, 78 Davol, 35 Dayton (place), 75, 76 Decatur (place), 198 Decision-making, 15, 16, 21, 41, 57, 193, 203, 205, 220, 224 Demopolis (place), 199, 200, 201 Dierks Forests, 85 Dill & Collins Incorporated, 76 Diversification, 22, 25, 28, 34, 35, 37, 41-44, 48, 49, 50, 63, 68, 70, 71, 75, 78, 81, 83, 85, 97, 100, 102, 108, 113, 114, 116, 118, 119, 128, 138, 139, 157, 158, 165, 172, 173, 201, 210, 214, 233, 270, 273, 274, 281, 282, 283, 284, 285, 286 Domsj s ö (place), 143-158 Domtar (company), 73

Cajander, A. K.(Finnish politician, chairman of EG’s administrative board in 1931-1943), 59

313

314

INDEX

Eastern Europe, 27, 81, 279, 280 Eddy Paper Corporation, 84 Ehrnrooth, Casimir (CEO of Kymmene), 182 Ehrnrooth, Gay (CEO of Schauman), 182 Ehrnrooth, Casimir (CEO of Kymmene), 109 Ehrnrooth, Göran (CEO of Union Bank of Finland), 117 Ellis, Chaflin and Company, 17, 75 Elving, Rudolf (CEO of Kymmene), 113 England, see Britain Enso-Gutzeit/Enso, 45-63, 95, 110, 116, 121, 124, 126-131, 173, 174, 176, 179, 180, 181, 211, 217, 235, 242-244, 248, 254, 258, 263, 265, 267, 269, 274, 281, 286 Enström, Axel (CEO of SCA 1950-1960), 142 Entrepreneurial orientation, 192, 193, 194 Escanaba Paper Company, 76 Eurocan (company), 114 Europe, 12, 68, 81, 83, 87, 102, 158, 161, 170, 209, 210, 211, 213, 216, 223, 226, 228, 256259, 261, 265, 266, 268, 270, 274, 275, 279, 280, 284 European Union, 109, 226, 256, 257 Everett (place), 82 E-Z Opener Bag Company, 198 Family firm definition, 168 Family firms, 3, 7, 16, 167-189, 191, 192, 197, 199, 201, 203, 204, 213, 216, 276, 285 Far East, 84, 272, 274 Federal Paper Board, 88 Federal Trade Commission, 71, 77 Federation of Finnish Forest Industries, 110 Ferguson, Sydney, 76, 77 Finland, 4, 12, 14, 17- 20, 45, 46, 48, 50, 59, 61, 112, 113, 115, 117, 118, 121, 123-126, 138, 145, 170-175, 180, 182, 185, 209, 212-216, 222, 225-257, 259-261, 263, 265, 266, 270, 274, 280, 284, Finnboard (sales association), 108, 109, 172 Finncell (sales association), 108, 109, 170, 172 Finnforest (company), 125 Finnish civil war, 117 Finnlines (company), 49 Finnpap (sales association), 108, 109, 115, 120, 121, 171, 172, 235, 243, 244 First World War, 110, 113 Florida, 36, 76, 85, 199 Flowerree, Robert, 70 Fold-Pak Corp, 200 Fort James Corporation, 73, 88 France, 78, 84, 85, 110, 111, 114, 143, 159 Fulton (place), 198 Gartz, Åke (member of the management of Ahlström), 187 Georgia (state), 18, 36, 67, 68, 69, 70, 77, 199

Georgia Hardwood Lumber Company, 18, 68 Georgia Kraft Company, 77, 78, 79 Georgia-Pacific Corporation, 16, 18, 65-74, 87, 88, 89, 91-94, 96-104, 201, 215 Georgia-Pacific Plywood and Lumber Company, 69, 83 Georgia-Pacific Plywood Company, 69 Germany, 31, 50, 59, 110, 111, 125 Gilbert Paper Company, 78, 80 Great Britain, see Britain Great Northern Nekoosa Corporation, 72, 88 Greece, 85 Groupthink, 217, 218 GSD Packaging, 200 Guatemala, 84 Gulf Consolidated Services, 79 Gulf States Paper Corporation, 16, 18, 191, 192, 197-204, 213, 216 Gutzeit, Hans (founder of Gutzeit & Co.), 45 Haarla (company), 134 Hahn, Marshall, 72 Hakkarainen, Niilo (CEO of UPM), 118, 120, 121, 128 Halle, Pentti (Leader 1962-1972, Enso-Gutzeit), 48, 60 Hamilton Paper Company, 85 Härmälä, Jukka (managing director, chairman of the board of directors 1992-, Enso-Gutzeit), 49, 59, 60 Heindl (company), 189 Hérnod, Torsten (CEO of SCA), 163 Hilden, Aarne T. (Leader 1972-1974, EnsoGutzeit), 48, 60 Holmen (company), 145, 146, 150, 215 Hörnefors, 149, 159 Hurlbut Paper Company, 78 Husum (place), 143-150 Idaho (state), 82, 83 Iggesund (company), 144, 145 Illinois, 197, 198, 199 Imatran Voima (company), 120 Indiana, 198 Indonesia, 71, 72, 85 Information, 3, 8, 14, 25, 27, 29, 31, 62, 66, 78, 123, 143, 162, 181, 205-208, 211, 217, 218, 219, 220, 221, 222, 223, 224, 274, 307-310 Ingham Mills & Company, 75 Inland Container Corporation, 77 Innovation, 5, 7, 28, 66, 71, 84, 103, 192, 193, 194, 224, 262, 263, 282 International Paper (IP), 7, 16, 17, 28, 31-43, 49, 63, 67, 80, 87-96, 215, 258, 266, 274 Iowa (place), 199 Italcarta (place), 143 Italy, 78, 143

I Jämsä (place), 117 Jämsänkoski (place), 117 Japan 81, 84, 143 Joutseno (place), 124 Joutseno Pulp (company), 120 Jujo Paper (company), 85 Jylhävaara (company), 117,121 Kaipola (place), 121 Kajaani Corporation, 47, 118 Kallio, Kyösti (President of Finland), 59 Kangaskoski (company), 117 Kaskinen (place), 123 Kaukas Corporation, 109 Kaukopää (place), 48 Kauttua (place), 19, 170 Kekkonen, U.K (president of Finland) 60, 61 Kemi (company), 118, 124 Kempe, Carl (CEO of Modo 1916-1949), 144, 162, 163 Kempe, Franz (the son of JC Kempe), 144 Kempe, J. C. (founder of MoDo), 143, 144 Kentucky, 199 Kieckhefer Container Company, 84 Kimberly-Clark (company), 67, 76, 103 Kirkniemi (place), 123 Kitimati (place), 48, 50 Korean War, 77, 148 Kotelnokia (company), 125 Kotilainen, V.A.(Leader 1924-1945, EnsoGutzeit), 47, 48, 60 Kotka (place), 45, 60 Kreuger, Ivar (Swedish industrialist), 142 Kuusankoski (company), 113 Kymi (company), 122, 124, 131 Kymmene (company), 16, 17, 18, 19, 27, 107, 109-116, 118, 121, 125-131, 133-139, 134, 167, 170, 173, 174, 176-182, 188, 234, 235, 240, 244, 250, 253, 258, 263, 265, 267, 270, 274, 277, 278 Laakirchen (place), 143 Laird Packaging, 200 Latin America, 11, 12, 81, 282 Lebanon, 78 Lehtinen, William (Leader 1945-1962, EnsoGutzeit), 45, 48, 51, 55, 59, 60, 62 Living company, 195, 196, 197, 204 Louisiana, 36, 198, 199 Louisiana-Pacific Corporation, 71 Luke Jr., John A., 80 Lundberg AB, 145 Lyberg, Bengt (CEO of Modo 1959-1971), 144, 159 MacMillan Bloedel, 87, 89 Malaysia, 85

315 Managerial cognition, 205, 206, 207, 208, 209, 212, 213, 214, 215, 216, 217, 218, 219, 220, 221, 222, 223 Manistique Pulp & Paper, 76, 77 Marseilles, 197, 198 Marshall Plan, 69 Maryland, 199 Mason, Steven C., 79, 80 Massachusetts, 76 Mattila, Olavi J. (CEO 1972-1983, EnsoGutzeit), 47, 55, 59, 60, 61, 62 McSwiney, J.W., 78, 79, 104 Mead & Nixon, 75 Mead & Weston, 75 Mead Corporation, 16, 17, 27, 65, 67, 74-80, 87, 88, 89, 91-104, 215, 258, 274, 275 Mead, Charles, 75 Mead, Daniel E., 75 Mead, George H., 75 Mead, Harry, 75 MeadWestvaco Corporation, 17, 66, 67, 74, 75, 80, 81 Merita Bank, 112 Metsä-Botnia, 123, 124, 125 Metsäliitto, 17, 19, 27, 51, 59, 95, 107, 110, 112, 122-128, 131, 133, 134, 135, 137, 138, 139, 173, 174, 176, 180, 215, 239, 240, 246-248, 258, 263, 269, 274, 286 Metsä-Saimaa (corporation), 123, 136 Metsä-Serla (corporation), 118, 125, 145, 214, 235, 239, 240, 244, 246-248, 251 Mexico, 80, 87, 198 Michigan, 76, 77, 84 Mikander, Lars (CEO of Ahlström), 188 Mississippi (state), 36, 84 Mississippi River, 198 MoDo (corporation), 17, 20, 27, 141-156, 158165, 215, 265, 274 Mölnlycke (corp r oration), 142-147 Mondi Paper (corporation), 143 Morris, Donald F., 77 Mossberg, Eije (CEO of SCA 1960-1972), 142 M-real (corporation), 107, 125, 215, 265 Myllykoski (company), 110, 117, 121, 125, 189 NASA, 79 National Bank of Finland (KOP), 112, 115, 118, 122, 235, 238-243, 246-248 Nautor, 173 Ncb (Forest Owners’ Association), 159 Neopac (company), 125 Nepotism, 186 New England, 43 New Jersey, 32, 84, 85 New York (state), 71, 198, 199 New Zealand, 36, 87

316

INDEX

Nippon Paper Industries (company), 85, 258, 277 Nokia (company), 55, 265, 270, 286 Noranda, 78 Nordea holding company, 112 Nordic Countries, 14, 18, 223, 261, 279, 284, 285, 286 Nordland Papier (company), 115 Norske Skog (company), 122 North America, 9, 11, 12, 19, 40, 63, 74, 80, 81, 86, 114, 131, 142, 170, 209, 216, 217, 218, 223, 258, 261, 266, 269-271, 279, 280 North Carolina, 76, 77, 84, 85, 199 North Pacific Paper Corporation (NORPAC), 85 Northern California, 82 Northern Pacific Railway (company), 82 Northwood Pulp and Paper (company), 78, 80 Nymölla (company), 160, 162 Ohio, 17, 75, 77, 79, 199 Olympia, 69 Orange (place), 198 Oregon, 67, 69, 70, 71, 82 Örnsköldsvik (place), 143 Ortviken (place), 143 Pamplin, Robert B., 70, 104 Panama Canal, 83 Papeterie de Pont Saint Maxence (PPSM), 159 Peaudouce (place), 143 Peking, 86 Personal construct, 207, 209 Philadelphia, 76 Philippines, 71, 85 Pohjan Sellu Oy (company), 120 Poland, 80, Portland, 69 Potlatch Forests (company), 82 Prairie States Paper Company (company), 198 Pringle, George H., 77 Proactiveness, 192, 193, 194, 195, 203 Procter & Gamble (company), 67 Product differentiation, 66, 172 Rantala, Pekka (CEO of Ahlström), 179 Rantanen, Juha, (CEO of Ahlström), 188 Rauma-Repola (company), 112, 118, 238-240, 247, 274 Reed Elsevier (company), 80 Reedpack (company), 143 Regis Finance B. V. (company), 125 Relander, Lauri (President of Finland), 59 Repola (company), 115, 118, 126, 127, 235, 240, 247, 248, 252, 253 Risk-taking, 162, 165, 192, 193, 194, 203 Resolution Packaging, 200 Roberts, Burnell R., 79, 80 Rogel, Steven, 87

Russia, 27, 110, 111, 113, 115, 120 Russian revolution, 108, 116, 120 Rydin, Bo (CEO of SCA 1972-1988), 142, 143, 156, 157 Salmi, Pentti (Manager Director 1975-1981, appointed chairman of the board of directors 1982-1991, Enso-Gutzeit), 47, 48, 49, 55, 59, 60, 61 San Angel (place), 198 Sargent Art, 78 Savon Sellu (company), 123, 124 SCA (company), 17, 20, 27, 73, 86, 141, 142, 143, 145-158, 162, 163, 164, 165, 210, 215, 217, 258, 265, 273 SCA-Mölnlycke, 157 Scandinavia, 16, 31, 76, 159, 266, 280 Schauman (company), 13, 17, 19, 20, 27, 167189, 216, 235, 244, 258 Schauman, Wilh. (founder of Schauman), 170, 188 Scotland, 115 Scott Paper (company), 76 SE-Banken/Wallenberg (company), 144 Second World War, 68, 83, 102, 103, 108, 110, 111, 113, 114, 115, 117, 119, 120, 121, 125, 126, 131, 134, 142, 174, 263, Sensemaking, 207, 209, 211, 212, 215, 219, 221, 223 Serlachius (company), 124, 126, 235, 246-248, 252 Shareholder value, 189, 196, 269, 270 Silverdalen, 160 Siman Packaging (company), 200 Simpele (company), 117 Simpele (place), 117, 124 Smurfit-Stone Container Corporation, 67 South Africa, 84, 143 South America, 157, 161, 218, 274, 276, 279, 280 South Bend (place), 198 Southeast Asia, 85 Southern Asia, 70 Soviet Union, 27, 110, 111, 131, 134, 161 Spain, 78, 80, 110 Springfield, 198 St. Petersburg, 120 St. Regis Corporation, 72, Stille-Werner, 144 Stockholm, 18, 20 Stora Kopparberg (company), 18, 165 Stora-Enso (company), 16, 18, 28, 165, 215, 217, 258, 265, 281, 286 Strategy process, 5, 6, 20, 108, 169, 182, 187, 256 Strömberg Corporation, 18, 114 Succession syndrome, 188

I Summa (place), 48 Svenska Handelsbanken (company), 144 Sverker, Martin-Löf (CEO of SCA 1988-2001), 143 Svinhufvud, P.E (President of Finland), 59 Sweden, 17, 20, 112, 141-145, 147, 155-159, 161, 173, 178, 209, 210, 212, 213, 214, 215, 222, 239, 257, 261, 265, 266, 270, 274, 280, 284 Switzerland, 78 Tacoma (company), 82 Tampella (company), 49, 114, 244, 248, 252, 274 Tanner, Väinö (Finnish social democrat politician), 59 Tatar, Jerome F., 80 Taylorville (place), 198 Tennessee, 76, 198 Teollisuuden Voima (company), 120 Texas, 85, 198, 199 The Livingston Box Company, 200 Ticonderoga (place), 32 Tiivola, Mika (CEO of Union Bank of Finland), 116 Timber Company, 73 Toledo (place), 70 Tornator (company), 47 Trus Joist International (company), 87 Tuscaloosa, 197, 199, 200 U.S. Plywood (company), 72 Uni-Charm, 143 Union Bank of Finland (SYP), 112-116, 118, 168, 234-236, 240 Unisource Worldwide, 73 United Kingdom, 110 United Paper Mills (UPM / UPM-Kymmene) (company), 16, 19, 27, 95, 107, 110, 112, 115-118, 120, 121, 122, 124-131, 133-139, 167, 174, 189, 214, 215, 217, 235, 238, 239, 240, 247, 253, 263, 265, 270, 278 United States (U.S.), 4, 7, 8, 16, 17, 18, 31, 32, 33, 34, 35, 36, 41, 51, 67-74, 76, 79-82, 84, 85, 86, 87, 90, 104, 111, 117, 131, 142, 178, 198, 200, 212, 215, 216, 217, 222, 260, 274, 280

317 UPM-Kymmene, 19, 115, 116, 118, 215, 217 Uruguay, 87 USA, see United States Valkeakoski (place), 117 Valmet, 60 van de Carr, Charles R., 77 Varkaus (place), 19, 170, 171, 175, 179 Veitsiluoto (company), 50, 51 Venezuela, 84 Virginia, 76, 77, 198 Voikkaa (company), 113 Walden, Juuso (CEO of UPM), 117-120 Walden, Rudolf (creator of UPM), 117, 119, 120 Walkiakoski (company), 117 Warner, Jack, 191, 199, 201 Warner, Jon, 201 Warner, Mildred, 191, 199 Washington (state), 17, 69, 71, 82, 83, 85 Washington Veneer Company, 83 West Europe, 142, 143, 145 West Germany, 78, 114, 115, 116 Westab, 78 Western Europe, 4, 11, 27, 31, 115, 211, 265 Westervelt, Herbert Eugene, 191, 198, 199 Weston & Mead (company), 75 Westvaco Corporation, 17, 67, 74, 75, 80, 81, 89 Weyerhaeuser Company, 17, 65, 66, 67, 81-89, 91-94, 96, 99-104, 143, 215, 258, 264, 273, Weyerhaeuser Sales Company, 83 Weyerhaeuser Timber Company, 17, 82, 83 Weyerhaeuser, Frederick E., 82, 83 Weyerhaeuser, Frederick K., 84 Weyerhaeuser, George H., 85, 92, 104 Weyerhaeuser, John Philip, 83 Wheelwright Paper Company, 76 Whitaker, Howard E., 77 Willamette Industries, 87, 89 Woods, Ed, 201 Woodward Corporation, 78 Wrenn Paper Company, 78 Wärtsilä (company), 123, 188 Zellerbach (company), 79, 80, 89