Topic: Analyzing strategies of Fine Paper Inc to adapt changing external environment
Order Description
Using relevant theories and concepts to analyze the case, and using information in the article to substantiate your answer.
Writing Assignment
The objective of this writing assignment is to deepen your understanding of theories and concepts about strategic management. You will read a Wall Street Journal
article about Mohawk Fine Papers Inc. and analyze its strategies to adapt to changing external environment.
Use information in this article, and analyze Mohawk Paper’s situation. In an analysis of approximately 600 words, answer the following questions.
1. What forces in the general external environment led to Mohawk’s decline in the 1990s?
2. Did Mohawk develop any new distinctive competences as part of its turnaround? What were they? Why did it develop them?
3. What’s the relationship of Shutterfly to Mohawk, buyer, supplier, or complementor? Why is Shutterfly important to Mohawk’s turnaround?
Instructions
When answering the questions, please follow the instructions below:
Read the Wall Street Journal article carefully.
Read the questions carefully.
Use relevant theories and concepts that have been covered in BUS 189.
Use information in the article to substantiate your answers.
Use an essay format.
Type your answers.
• Double-spaced; with a font type of Times New Roman; with a font size of 12.
Refer to the writing rubric enclosed in this writing assignment packet for grading criteria.
Save your answers in a word document, and upload it onto Canvas.
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TECHNOLOGY
U.S. Paper Industry Gets an Unexpected Boost
Americans renew their relationship with paper, ditching the cheap stuff for reading
news to buy expensive stock for photo-based cards and albums.
Updated March 7, 2014 11:01 p.m. ET
COHOES, NY—For three generations, Mohawk Fine Papers Inc. ran a mill at the juncture of the
Mohawk and Hudson rivers, selling paper to IBM, Exxon Mobil, General Electric and other corporate
giants for annual reports.
But as business moved online, company President Thomas D. O’Connor Jr. was left to rescue the
firm his grandfather founded 83 years ago in a former Civil War-era ax-handle factory.
Mohawk, the town’s largest private employer, was fast losing revenues as companies cut back on
paper for brochures, reports and marketing materials. Operations at its 350,000 square-foot mill
High-end paper from the Mohawk paper company in Waterford, N.Y., supplies online juggernaut
Shutterfly for photo-based cards and albums. Michael Rubenstien for The Wall Street Journal
By KATHERINE ROSMAN
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shrank from seven days a week to five to four. “For the first time in hundreds of years,” Mr.
O’Connor said, “paper had to justify itself.”
Then, in 2004, Mr. O’Connor made an extraordinary bet, given the digital revolution that appeared
ready to crumple Mohawk and every paper firm like it: His company borrowed millions to expand
into the fine stationery business.
The investment is now paying off as Americans renew their relationship with paper—consuming
less of the cheap stuff for reading news, bill-paying and record-keeping and, in Mohawk’s case,
buying more expensive stock for personalized holiday cards, announcements and photo books from
online juggernauts such as Shutterfly Inc.
Since the market low in March 2009, the stocks of paper companies have grown about five times as
much as the S&P 500, according to the Dow Jones index of publicly traded paper companies.
International Paper Co. , the world’s largest producer, is among the companies profiting from new
digital habits. It bought several makers of corrugated cardboard boxes, which now fill with goods
shipped by online retailers like Amazon. The Memphis-based paper company said it has a 35%
market share.
“We’ve been able to increase margins and
profitability,” said John V. Faraci, International Paper’s
chairman and chief executive, by relying less on the
shrinking copy-machine paper business as it stakes
out more lucrative territory.
The company last month announced a nearly $70
million investment to double the size of an Ohio plant
A line worker at Mohawk Paper. Michael Rubenstein
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making food-industry paper products like the coffee
cups used at Starbucks. It has retrofitted one mill for
fluff pulp, the material in diapers, for export mostly to
China.
IP’s reinvention, engineered by Mr. Faraci in 2005,
was funded by the sale of 6.8 million acres of
forestland for nearly $7 billion to multiple buyers over two years, the largest U.S. land transfer since
the 1803 Louisiana Purchase, the company said.
Profits from IP’s paper business operations grew 44% to $2.6 billion in 2013 from $1.8 billion in
2004, officials said, compared with 9% growth in revenues over the same period.
There is no question U.S. paper industries have suffered over the past 10 years, and consumption
may never return to the peak volume of 2000, when 94 million tons of paper and paper-based
packaging were produced. Last year, volume was off 14.5% from the high, according to the
American Forest & Paper Association.
Lower demand for newsprint, printing and writing paper account for about 85% of the decrease.
Measures by the U.S. government to go “paperless” landed earlier blows, said Elaine Kamarck, of
the Brookings Institution.
From 1993 to 1997, Ms. Kamarck oversaw Vice President Al Gore’s initiative to make the federal
government more efficient. New government websites surfaced and taxpayers were permitted to file
income tax returns online. “I don’t remember any lobbying from the paper industry,” she said.
Tension at the time was over committing government resources to services seen as mostly
accessible to upper-middle-class Americans. “There was huge talk about the Internet gap, the gap
A worker at Mohawk Paper. Michael Rubenstein
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between rich and poor, the Internet is only for rich people,” Ms. Kamarck said. “No one really saw in
the 1990s how quickly home computers would become affordable.”
The paper industry, caught flat-footed, has since rebounded by tracking shifts in American culture.
Mohawk, for one, is taking advantage of paper’s transformation from commodity to keepsake,
supplying high-quality paper in a market “where paper really matters to people,” said one company
official—and where the margins are as high as 40%.
In 1998, sales of paper to digital companies comprised $10 million in revenue, Mohawk officials
said. In 2012, sales to digital customers reached $100 million in sales, about 40% of company
revenue.
A decade ago, when the company was in free fall—and Mr. O’Connor’s father, then-chief executive
Thomas D. O’Connor Sr., took ill with esophageal cancer—Mohawk sought to buy seven fine paper
and stationery brands from International Paper for $61 million.
The deal, which included the well-known Strathmore brand, would give Mohawk access to new
markets in the U.S. and Europe and a chance to replace its disappearing annual report business.
“We couldn’t just downsize and hope to survive,” Mr. O’Connor said. “We knew we had to change
our product completely.”
To make the shift, Mohawk sought more than $100 million in credit lines and loans. A year earlier at
a board meeting, Mr. O’Connor recalled, “I announced our debt was at $8 million. My father, in front
of everyone there, called me out. ‘How did you let our debt get this high?’ ”
To buy the stationery companies, Mohawk’s debt would balloon to $103 million. “I still can’t believe
we got a loan that size,” Mr. O’Connor said. “Our debt is now about a third of that.”
A Shutterfly finishing lead operator inspects book pages. Will Seberger
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Mr. O’Connor, Sr., died on Nov. 30, 2004, a day before Mohawk signed a letter of intent for the deal.
Mr. O’Connor Jr., then president, took the role of chief executive and kept the mill open.
Mohawk sales had first started declining in 1996, when the Securities and Exchange Commission
began to phase in an electronic platform for companies to upload and make public their financial
reports. That year, the company also bought a $6 million machine to cut paper into smaller-than-standard batches, a big investment with no immediate use. “People
thought we were crazy for
buying it,” Mr. O’Connor said.
The investment paid off a decade later. The annual-report business collapsed in 2007, after the New
York Stock Exchange said its companies didn’t have to distribute the reports to shareholders. The
change “had a dramatic effect on our first quarter, which had just a few years earlier accounted for
almost a third of our revenue,” said Bart Robinson, Mohawk’s senior vice president for marketing.
The company successfully courted the emerging digital printing industry that needed smaller-than-standard batches of paper.
Within four years, Mohawk’s fourth quarter revenue—derived from sales to Shutterfly, Minted.com
and others during holiday card season—would make up the shortfall from its former corporate
customers.
In 2008, Shutterfly was a Mohawk client, but it wasn’t buying the company’s expensive paper. “We
decided to beta test how digital printed photo cards would look with our Mohawk Superfine,” said
Christopher M. Harrold, Mohawk’s vice president for business development and creative director.
So Mohawk paid $2 million for a photography software company that enabled Mr. O’Connor and his
team to launch an online company, Pinhole Press, to experiment with personalized stationery and
greeting cards. The idea was to better understand small-batch digital printers like Shutterfly.
A Shutterfly shipping employee prepares boxes for shipment. Will Seberger
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Mohawk asked employees to order their holiday cards through Pinhole, using Mohawk’s pricey
Superfine grade of paper.
When employees reported a big reaction from friends and relatives, Mohawk took samples to
Shutterfly, and now 40% of the paper Mohawk sells Shutterfly is Superfine, the company said.
“Mohawk is one of our main suppliers, they are a very important partner to us,” said Dwayne Black,
senior vice president of operations for Shutterfly. The company’s 2013 fourth quarter earnings had a
net revenue increase of 17% to $410.8 million from 2012, sales dominated by personalized holiday
cards.
“It was a bet,” said Mr. O’Connor of the Pinhole Press experiment. “We didn’t know it was going to
work—you never do. But it sure is fun when it does.”
Mohawk also supplies expensive stock paper to Moo.com, which in 2012 printed 100 million
business cards. Customers pay as much as $30 for 50 heavy-stock business cards because “the
more cheap and easy uses of technology permeate our culture,” said chief executive Richard
Moross, “the more valuable are the moments of real-world interaction.”
Other paper companies are seeking their own ways to straddle the physical and digital worlds.
Arrigo Berni, the chief executive of Moleskine, the notebook company, said market researchers
found his customers were more likely to be heavy users of digital products than others. “Far from
perceiving these two dimensions—the analog and the digital—as separate and opposite, they see
them as a continuum,” he said of his customers.
In a joint-venture, Evernote, the cloud-based note-taking company, retooled its app to better read
and search photographs taken of notes jotted in Moleskine notebooks.
Evernote also has joined with 3M, the St. Paul, Minn. conglomerate, to promote the idea that Post-it
Notes can be easily photographed and stored online for easy access.
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Paper’s resilience has its critics. Allen Hershkowitz, a senior scientist at the Natural Resources
Defense Council and the director of its Paper Industry Project said the industry is a big energy user,
a leading consumer of freshwater and a top emitter of greenhouse gasses. “Ecologically, the paper
industry is one of most impacting,” he said.
Thomas J. Ryan, a spokesman for IP, said recycled materials are key ingredient in its boxes and
paper, and the company’s U.S. mills run on 75% renewable biofuels. The paper industry plants 1.7
million trees a day, he said, more than it harvests.
Mohawk has placed a few bad bets, including chlorine-free paper the company thought would
captivate environmentally-concerned consumers. It didn’t.
Looking ahead, Mohawk has invested in a research lab housing two industrial digital printers from
Xerox and one from Hewlett-Packard. The company hopes to show designers, ad executives and
printing companies new ways to pair digital printing with high-end paper.
“We need to engage at a much more base level than just being ‘the paper guy,’ ” Mr. Harrold said.
Among the lab’s future projects are printing Mohawk’s quarterly industry publication, “Maker.” With a
circulation of 30,000, the magazine features stories and images connected with Mohawk—like the
100-plus-year history of its Strathmore brands. Each issue is published on a different type of
Mohawk paper: Superfine; Loop, a recycled fine paper; and Strathmore watermarked cotton
stationery.
“We are trying to inspire people to see that fine paper and stationery can be used in ways they
hadn’t imagined,” Mr. Robinson said.
Mohawk’s purchase of the writing brands has been profitable but required tough decisions, the
company said.
As part of the deal, Mohawk received two paper facilities, including a paper mill in Hamilton, Ohio. In
2011, Mohawk closed the mill, laid off 137 employees and transferred production to Cohoes and
Waterford, N.Y.
Last year, the remaining Ohio plant in Ashtabula made 500 million stationery envelopes to match its
letterhead and writing paper. This year, Mohawk plans to make 2 billion envelopes, and hire 125
employees.
Mr. O’Connor said he expected revenues from the plant this year to reach $46 million from $19
million in 2013.
The 57-year-old chief executive supports the stationery end of the business by writing letters each
month to each of his four children. “It’s the only way I can be sure they listen to what I say, and they
can’t delete it,” he said.
A Shutterfly employee loads envelope stock into a machine at the company’s Phoenix, Ariz. plant. Will
Seberger for The Wall Street Journal
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Write to Katherine Rosman at katherine.rosman@wsj.com
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