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MSOD 617: Industry and Firm AnalysisRuthie Weller, Michael Jonckheere, Sarah RowePepperdine UniversityIndustry Analysis: Forest, Paper & Packaging IndustryOur group conducted an analysis on the forest, paper and packaging industry and one of its major firms: Weyerhaeuser. Using the most relevant of Porter’s five forces model as the basis for our analysis, we determined the industry is not attractive for investors and funds would be better invested in a money market. Supplier Power: Supplier power in the forest, paper and packaging industry is strong. The industry, particularly at the top of the supply chain, is comprised of large, vertically integrated companies. The timberland owners have substantial power over their customers because there are a small number of large-sized companies with access to prime timber real estate. These timberland companies, however, are subject to powerful supplier forces themselves. Their own timber supply is tightly controlled by government regulations for harvest quantities and environmental standards. Margins are also impacted by government’s manipulation of interest rates and tariffs. Land, mills and equipment are typically leveraged by debt. At the same time, changing interest rates affects the housing industry and therefore creates or removes a critical source of demand for timberland products.A step down the supply chain is pulp, paper and a variety of other types of mills. The cost of inputs such as woodchips, chemicals, recycled paper and pulp make up about 60% of this segment’s revenue (IBISWorld, 2014). Suppliers of these inputs are more concentrated than the buyer segment and for many of the wood product supplies (wood chips, lumber, etc.) significant transportation costs make it costly to switch from the geographically closest supplier. Another essential input comes from utility companies because the industry uses substantial quantities of water, fuel and electricity for daily operations (IBISWorld, 2014). These suppliers are typically large energy companies or government entities that are highly concentrated and therefore have significant control over pricing, giving firms little to no bargaining power.Buyer Power: Buyer power is moderate in the forest, paper and packaging industry. Buyer power is limited because of increased fragmentation down the supply chain from a small number of large timber companies to a large number of independent mills to a heavily dispersed wholesale and retail market. While the product is a commodity, high switching costs exist for buyers due to transportation expense. Additionally, customers are unlikely to backward integrate due to heavy investment costs in buying land or establishing a mill and wood products are of high strategic importance to buyers. These factors are mitigated due to high fixed costs in the supply business, price sensitive customers and the production costs of the product being well known in the industry.Threat of Substitutes: The threat of substitutes in this industry is medium and growing. Although the threat of substitution for timber is low, the threat of substitution for paper, which represents nearly a quarter of the industry, is significant and on the rise (IBISWorld, 2014). This is due to technological advancements such as smartphones and e-readers and the shift to electronic options like online publications, e-billing, and internet applications (Benway, 2014; IBISWorld, 2014; PricewaterhouseCoopers LLP, 2013; Dilworth, 2014). Many newspaper and book publishing companies have moved exclusively to digital print and a variety of other technologies now threaten calendars, magazines and other traditionally printed materials. These advancements have resulted in a significant decline in the demand for printing paper in recent years. According to trade publication, Pulp & Paper Week, uncoated free sheet shipments have declined on average by 3% annually, since 1999 with shipments in 2013 less than 50% of 2005 levels (Benway, 2014; Dilworth, 2014). This drop, which prompted a number of industries to close in recent years, is attributed in part to increased use of new forms of communication (Benway, 2014; Dilworth, 2014). As developing countries become more accustomed to digital media, this threat is predicted to rise (IBISWorld, 2014).Rivalry: The threat of rivalry in the industry is high. There is little differentiation between industry firms and their products, resulting in considerable price competition. This is compounded by the ease with which countries can import and export timber and pulp, which increases both foreign and domestic price competition (IBISWorld, 2014). Low levels of market concentration in pulp and paper have increased the competitive nature of the industry as well, with smaller local firms occupying 94.8% of the market share worldwide (IBISWorld, 2014). With high capital costs and specialization involved in constructing mills, barriers to exit remain high, driving increased rivalry (Dilworth, 2014). Strong competition from industries in emerging economies has also driven competition and industry fragmentation such as in South America where agricultural and labor rate advantages have enabled markets to expand their pulp capacity and growing domestic demand visa-vis competitors (Deloitte, 2013). Finally, merger and acquisitions have been very common in the industry over the past five years, driven primarily by the desire to acquire the necessary know-how to support innovation and control the supply side of the industry (IBISWorld, 2014; Dilworth, 2014; PricewaterhouseCoopers LLP, 2013).Firm Analysis: WeyerhaeuserWeyerhaeuser’s position in the industry is cost leadership. This strategy can be seen in each of its business segments as the firm focuses on cost reduction while maintaining a competitive pricing structure and providing high quality, value-added products. Today Weyerhaeuser owns or manages approximately 20.3 million acres of timberland across 11 countries. Weyerhaeuser focuses on four primary business segments: timberlands, wood products, cellulose fibers and real estate (Weyerhaeuser, 2013). In the timberlands business, Weyerhaeuser grows and harvests trees aiming to “extract maximum value from each acre” they own or oversee (Weyerhaeuser, 2013, p. 2). In the wood products division the manufacturing and sales of wood products focuses on delivering “high-quality lumber, structural panels, engineered wood products and complementary products for residential applications” (Weyerhaeuser, 2013, p. 2). When selling in the cellulose fibers market the company focuses on value-added pulp products. The real estate business endeavors to build and sell homes as “unique value propositions in target markets” (Weyerhaeuser, 2013, p. 2).Weyerhaeuser currently holds a competitive position as one of the largest firms in the forest, paper and packaging industry. Ranked third according to revenue among North American paper and forest products companies with December 2012 revenues reported as $7,059 million, Weyerhaeuser is a strong competitor in the North American market (Benway, 2014). In the international market, the firm is making slow, but steady upward progress in the ranking of the Top 100 Global Forest, Paper & Packing Industry companies. With sales of $4,624 million in 2009 (19th globally), and sales of 5,629 million in 2010 (16th globally) the firm is demonstrating steady and promising growth since the economic downturn of 2008 which profoundly impacted the whole of the global industry (PricewaterhouseCoopers LLP, 2011).In order to continue its growth position within the industry, Weyerhaeuser has implemented numerous cost reduction and value-add initiatives within each of its business segments. Since 2011, the firm has effectively harvested its resource timberlands and managed an inventory level corresponding to market demand. This has made a year round flow of logs to internal and third party customers possible. Weyerhaeuser’s efficient management of inventory and ability to deliver to mills nearby its timberlands has enabled it to see a steady increase in timberland sales from $1,251 million in 2009 to $2,142 million in 2013 (Weyerhaeuser, 2013). This increase demonstrates the firm’s gains in obtaining an increased market share through inventory management and increasingly cost efficient distribution.Weyerhaeuser also acquired Longview Timber in July 2013 adding approximately 645,000 acres of timberlands in Oregon and Washington. This purchase is in close proximity to other Weyerhaeuser timberlands providing productive lands with increased harvest options. In time, this acquisition will provide expanded capacity reaffirming the company’s strategy of cost leadership (Weyerhaeuser, 2013). ??In the wood products division of Weyerhaeuser, the focus is on reducing controllable manufacturing costs to achieve an industry-leading cost structure while maintaining a value-added product mix (Simons, 2014). This demonstrates the firm’s intention to be a cost leader in the wood products market. The company is striving for operational excellence that will reduce manufacturing costs by $30-40 million in 2014 (Simons, 2014). Additionally, by the end of the second quarter of 2014, Weyerhaeuser had reduced its distribution costs by reducing warehouse, delivery and sales costs by 4% (Simons, 2014). ?Weyerhaeuser is one of the world’s largest producers of fluff pulp, the absorbent material used in products such as diapers. The firm’s stated competitive strategies in this business segment include: “improving cost-competitiveness through operational excellence; focusing capital investments on product quality, cost reduction and green energy opportunities; and driving growth of higher margin products” (Weyerhaeuser, 2013, p.13). Weyerhaeuser reduced capital spending in this cellulose fibers business segment from 160 million in 2012 to 92 million in 2013 (Weyerhaeuser, 2013, p.13). In an industry with capital-intensive manufacturing and production processes this signals successful cost leadership. In 2013, Weyerhaeuser divested Weyerhaeuser Real Estate Company (WRECO), the homebuilding and real estate development business. This Reverse Morris Trust transaction allowed the company to reorganize and be acquired by Tri Pointe Homes, Inc. (Weyerhaeuser, 2013). The sale of this business segment demonstrates Weyerhaeuser’s commitment to being a cost leader; enabling it to transition its focus to “growing, harvesting and selling trees, and converting them at the lowest possible cost into products their customers want and are willing to pay for” (Weyerhaeuser, 2013). Reports from J.P. Morgan (2014) and BMO Capital Markets (2014) note that Weyerhaeuser has made significant strategic changes to increase their competitive advantage through cost leadership in recent years. The sale of WRECO and the acquisition of Longview Timber have demonstrated the company’s focused intent to narrow into the timber, wood products and cellulose fibers markets. Weyerhaeuser’s commitment to increase profits for it’s shareholders by reducing costs and increasing operational efficiency across business segments is paying off as earnings have increased in 2013 and the first two quarters of 2014 (J.P. Morgan, 2014). Projections indicate that the future is favorable for this focused firm as gains in performance and gradual cyclical improvements are causing the strength of the company to increase (J.P. Morgan, 2014).References:Benway, Stewart J. (2014, February). S&P Capital IQ: McGraw Hill Financial. Industry Surveys: Paper & Forest Products. Retrieved from Capital Markets. (2014). Timber & Wood Products: Weyerhaeuser. Retrieved on September 3, 2014 from BMO Capital Markets Corp. Deloitte. (2013). 2013 Global forest, paper, and packaging trend watch; A changing landscape: South America’s influence on global markets. Retrieved from?, J. (2014). Forestry, Paper & Packaging. Retrieved from . (2014, August). IBISWorld Industry Report. Global Paper & Pulp Mills. Retrievedfrom IBISWorld database.J.P.Morgan. (2014). Weyerhaeuser. Retrieved September 5, 2014 from North America Equity Research.PricewaterhouseCoopers LLP. (2011). Global Forest, Paper & Packaging Industry Survey: 2011edition – survey of 2010 results. Retrieved from LLP. (2013). Global Forest, Paper & Packaging Industry Survey: 2013edition – survey of 2012 results. Retrieved from , Doyle (2014). WY presented at UBS global paper & forest products conference [PowerPoint slides]. Retrieved from . (2013). Growing a truly great company: Weyerhaeuser 2013 Annual Report and Form 10-K. Retrieved from ................
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