The Impact of Product Technology on the Marketing Issue
-New Development within the Paper Supply Chain-
Bo Rundh, Karlstad University, Karlstad[1]
Keyword: Competitive Strategy, Supply Chain Management, Technology Development
Introduction
The development of the Swedish pulp and paper industry are based on some basic industrial factors such as the location of the raw material in combination with the quality of the fibre. Another important factor has been the supply of cheap energy a factor that is loosing its importance due to different environmental taxes on energy. However, during the 50’s and the 60’s the domestic fibre lost its competitive advantage in relation to fast growing fibres in other regions. At that time the production factors come into focus and the restructuring of the pulp and paper industry started which also made it necessary to close down some mills due inefficiency in relation to the prevailing competitive situation. Investments were also made in larger mills and machines in order to reach economies of scale. Chemical pulp and integrated paper production were also important factors to reach a competitive edge in relation to other producers and due to export from North America.
During the 70’s and 80’s it was also possible to notice a lot of mergers and acquisitions in different local markets in Western Europe. This strategic orientation has therefore been an important issue for the Swedish pulp and paper industry in order to increase market shares. This strategic interest for establishing activities in different local markets is expected to continue, but even if the importance of added value products has increased there is still a high dominance of exporting products with a low added value.
The increased investments in production facilities and production technology have also lead to a degree of production orientation within the industry since it has been necessary to reach a high production level even to brake even. An increased competition from other materials such as plastics and new packaging solutions has put greater emphasis on trying to create new products and innovations within the industry.
Due to the competitive situation in different market areas the paper industry is under the pressure of a need for improving the profitability by overhauling its purchasing and marketing activities. This is done in order to reduce costs and improve efficiency and supply chain management has become a new paradigm for the industry. Both mills and suppliers have responded to this paradigm by forging integrated and long-term relationships built on communication, commitment and mutual gain.
Traditionally paper companies have chosen their suppliers to a great extent on competitive pricing and service. While pricing and service remain important, the relationships between paper companies and suppliers have changed. Similar to the competition in other industries e.g. the situation in the automobile industry during the late 1980s and the early 1990s, today’s business climate in the paper industry brings pressure for improved profitability, cost reductions and efficiency improvements.
At the same time paper companies have integrated forward by mergers and acquisitions in order to build up a market position on different markets and product areas in the local market structure. Due to structural changes and concentration within different industry’s the paper companies have also come under the pressure from big buyers, especially from customers selling consumer products e.g. the food industry. The pulp and paper industry has therefore been under the pressure from different market dynamics.
Research Design
This paper is based on results from an ongoing research project about strategic changes taking place in paper producing companies due to a rapidly changing business environment. In order to stay sustainable in the changing business environment a company must be able to not only manage the standard economic factors affecting the core business, but also environmental and social factors as well. In order to follow different changes in the market place as well as the different companies’ strategic action a longitudinal approach has been applied, which will make it possible to follow the companies’ actions over a longer period of time. At this stage of the research the interest has been concentrated on four technology areas, which represent dynamics that might affect the strategic direction for a company.
The research method is a triangulation based on official documents from the companies involved in the study e.g. annual reports but also internal documents and official material published by the company’s e.g. on internet. However, the main information comes from interviews with managers in the companies at Division level in the company. In these interviews an interview guide has been used, but the managers has also been allowed to describe their perception about what they recognise as important factors affecting the business environment for their core business. The managers have also been asked to describe how their company will meet those challenges. At this stage the producers have been interviewed but the intention is to follow the supply chain in order to study how different members in this chain can create value for the end customer. Due to the increased fragmentation by the end consumer e.g. single household, an ageing population and an increased demand for consumption in developing countries this study is also concentrated to products based on paper packaging materials.
Research Aim
The research issue in this paper can therefore be emphasised by – How can a paper company use product innovation based on investments in technology for this new competitive situation, or is a new strategic marketing orientation necessary?The intention is to use a qualitative study by interviewing management in a specified number of companies. The data collection will also be completed by secondary data from the same companies.
Product Innovation
Every company has its strength and weaknesses but companies that are consistently successful in the development of new products and services are likely to be rewarded by higher margins, increased market share and superior financial performance. Innovation can take two basic forms. Product innovation that makes a change in the products or services that a company offers, or process innovation that makes a change in the ways products and services are created in relation to its customers and markets. A second dimension of innovation is the degree of novelty involved. Innovations can range from simple improvements of existing products and processes (Rundh 2002) to radical new innovations transforming an industry. Booz, Allen & Hamilton (1982) has in their early work categorized development projects into six different types:
- Improvements to existing products
- New-product lines
- Addition to existing product lines
- New-to-the world products
- Cost reductions – process development
- Repositioning – product augmentation development.
Conceptually it is not difficult to identify the contribution that innovation can make to competitiveness for a company. On the other hand it is more difficult to find an empirical relationship between innovation and performance. Two broad classes of performance measure
Type of Innovation / Competitive AdvantageDisruptive / Re-writing the rules of the game, creating a new value proposition
Radical / Offering a high novelty or unique product or service, premium pricing
Complex / Difficulty of learning about the technology keeps entry barriers high
Continuous incremental innovation / Continuous movement of the cost/performance frontier
Table 1: Innovation and Competitive Advantage ( Tidd 2001)
have been used. The first is concerned with the financial performance e.g. profitability and return on investment and the other with market performance such as growth or share of the market. There have also been other typologies by different researchers. Christensen (1997) has distinguished two types of innovation; the first is sustaining innovation which continues to improve the existing product functionality for the prevailing customers. The second is the disruptive innovation which provides a different set of functions which are likely to appeal to a different segment of the market. In many market situations companies are likely to ignore disruptive innovations as these might appear inferior to existing technologies which are more likely to be exploited to new entrants.
There is also a significant body of research about product innovation covering different aspects. Some of the research concerns the success (Cooper & Kleinschmidt 1993; Flint 2002) or failures of new products, while others are interested to explain the management (Tidd 2001; Tidd & Bodely 2002) or decision process of innovations. Others cover the aspect of an innovation culture in the company (Kampas 2003) and the importance of strategy (Fleming & Sorensen 2003). However, product development or innovation can contribute to a number (Johne 1994) of important business objectives; (1) building strategic competitive advantage in target markets; (2) increasing market share by offering products which are preferred above those of competitors; (3) increasing profitability by introducing more profitable lines; (4) building a reputation for technical excellence by introducing state of the art products.
Offering development is often as critical to market acceptance as the performance attribute of the product, but there are also many other factors affecting the buying decision in the industrial context. In most cases it is the total marketing mix aimed at specific customer groups which will determine a target market’s response.
Market Development – Innovation and the Market Place
Market development occurs when a company seeks new markets and new users of its products. Market development has also a close relation to product development and innovation since it is concerned with improving the mix of target markets into which the existing products can be sold. Market development is essentially about changing the prevailing customer base. In most cases market development is about introduction of an existing product to a new market or segment. Selling a product to international markets is in effect a market development strategy. An innovative product concept can therefore be aimed for the existing customer base or at new or at new customer groups. However, Cooper & Kleinschmidt (1993) found this to be unimportant for explaining product development success factors within the chemical industry.
Innovation (Wilson 1991) will not in itself guarantee success. The market is a graveyard of brilliant innovative ideas which failed somewhere along a continuum from the concept to the counter. To many products and service ideas are created in isolation from the user and there is all too frequently a gap between the basic idea and the ultimate refined product. This gap is not necessarily a technical one (p 69). The interaction between customer and supplier is one important factor that encourages successful innovation, but there are many others such as financing, production, distribution, service or communication with the market. The distance between e.g. R & D and the market must be narrowed so that all managers concerned with the innovation have a view of the market and the opportunities.
Competitive Strategy
Developing an effective competitive strategy is vital for the company. According to the work of Porter (1979,1980, 1985) there are three fundamental ways of achieving a sustainable competitive advantage for a company. This can be done by cost leadership, differentiation or focus. By cost leadership the company sets out to be the low cost producer within the industry. This assumes that cost can be reduced e.g. through economies of scale and that this is vital to the customer. The risks are that cost leadership cannot be sustained, competitors might imitate and technology changes or any other basis for the cost leadership might be eroded. With differentiation the firm sets out to be unique in the industry along some of the dimensions that are widely valued by customers. The risks associated with this are that the differentiation cannot be sustained as competitors imitate or the unique selling proposition becomes less important to customers. By a focus strategy the company focuses on a narrow target market segment combined with either of the other strategies. The risks are that it can be imitated, the segment become unattractive, smaller segments start to appear or the basis for the segmentation disappears as the differences between segments disappears. It is therefore vital that the management understands the basis for its competitive advantage and that it is eroded over time by different driving forces in the market place.
Marketing Strategy
The marketing concept requires more than being able to meet customer needs - it requires meeting them better than competitors. Customers choose those suppliers, which offer the best value. If a company does not have a competitive advantage it will lose market share or have to cut prices to retain the market share. Strategic market planning is concerned with adapting the organisation to a changing environment. Organisations succeed when they meet the need of customers more effectively than competitors. According to Greenley (1993) the framework for developing marketing strategy can be explained by the stages of strategic planning at three different levels (1) corporate mission, (2) corporate strategy and (3) the actual marketing strategy. The actual marketing strategy (Greenley, 1993; Sudharasam, 1995; Hooley, 1998) can be formulated in different ways, but usually it include the following dimensions (1) the product or service market where the company compete (2) the level of investment to maintain or grow the business (3) the product line, positioning, pricing and distribution strategies needed to compete in the selected market segments (4) the assets or skills to provide a sustainable competitive advantage.
Influencing Factors
Due to the increased globalisation (Chee & Harris 1998) there are many factors influencing the pulp and paper industry. The main emphasis in this paper is to discuss how external changes and different driving forces from technology will challenge the strategic management within the pulp and paper industry. For Nordic companies Western Europe is still the home market in competition with local producers and an intensive competition from companies in North America and Canada. New actors from South Africa and Asia are also adding to that competition. At the same time Nordic companies are interested to expand their business into evolving market areas in Asia and into Latin America. The increased competition will focus the strategic issues in this business sector and require a higher market orientation.
Threats of substitute products
Some of the competition within the paper and especially the packaging industry is also coming from substitute products. Different solutions to packaging problems have been possible to solve by using plastic materials. In other areas plastic has been combined with paper or board to create new combinations which have given customers new products with other properties.
Bargaining powers of suppliers
One important driving force within the paper industry is coming from new technology. The pulp and paper industry has during several years been driven by technology and a high product orientation. Due to structural changes within the networks on the supplier side the bargaining power has increased from the supplying side of technology.
Bargaining powers of buyers
Due to concentration within many industries e.g. the food sector, but also on the retailing side the bargaining power has increased from different groups buying packaging material. This has also influenced the roles of the parties within the paper supply chain.
New entrants
The paper industry has also faced competition from new suppliers in other regions and parts of the world. These competitors have been able to base their production on lower costs for raw material and other manufacturing costs.
Other Market Factors
The consumption of paper and packaging materials (Mautssek. Ed., 2000) is varying between different countries around the world and there are several reasons for this wide spread of this consumption. A customer orientation within the company is about planning for customers’ needs and researching markets continuously so that the company’s products reflect what the customers want. Customer orientation is also about the ability to create value (Eggert & Ulaga 2002) for the target customers which require a deep understanding of customer requirements.
A market orientation also requires an understanding of the competitive situation within the particular industry where the products are sold. It is also necessary that a company is co-ordinating their resources to reach this level. Due to rapid changes in tastes and habits by end consumers but also depending on changes within sizes of households and other demographics it also necessary that the suppliers can track and analyse such important trends. Other market factors will therefore have a great influence on the demand for different paper and packaging products. Despite the use of electronic media it has so far increased the consumption of paper in volume terms. However, the media habits for the coming generation might be different from now on. The development of e-commerce within the paper industry might also affect trade patterns in different industries as well as the consumption and stockholding of different paper and packaging products.