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Industry Analysis Global Paper Products

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Submitted By TheDork325
Words 1322
Pages 6
Porter’s Industry Analysis of the
Global Paper and Paper Products Industry

BY: Craig I Dworkin
Date: March 12th, 2012
Threat of New Entrants
Rate of Force: 4 (Moderately - High) 6 Economies of Scale 3 Product Differentiation 6 Capital Requirements 2 Switching Costs 4 Access to Distribution Channels 2 Cost Disadvantage Independent to Size 5 Government Policy

The Global Paper and Paper Product Industry are considered to have a high barrier to entry. It is “rather costly, due to the high capital outlay and fixed costs involved in setting up and running production plants.” Economies of scale provide a competitive advantage for larger companies as they are able to increase production in order to reduce cost per unit. New entrants could also be discouraged by increased governmental and environmental regulation. Larger players tend to also control access to distributions and could discourage new entrants from entering. Switching costs are rather simple because there is no uniqueness to the product. “However, entry barriers are lowered by the lack of differentiation within this industry.” Some countries have also introduced economic incentives for the Global Paper and Paper Products market. These incentives could create a favorable investment environment for new entrants.

Rivalry Among Existing Firms
Rate of Force: 4 (Moderately High)
2 Rate of Industry Growth
1 Product or Service Characteristics
5 Amount of Fixed Costs
6 Capacity
6 Height of Exit Barriers
4 Diversity of Rivals

The Global Paper and Products industry is considered highly fragmented. The five largest companies control less than 5% of the total industry. “Consolidation activity has again heated up in the paper and forest products industry” as growth has stalled and companies are in search of synergies to reduce costs. There aren’t many distinct product differences to the products that are offered and it is easy to switch to a competitor. The Global Paper Product Industry has a difficult time controlling their capacity. They tend to operate their factories at max capacity, often creating excess supplies that drive down price. Besides having a high barrier to entry, the industry also has a high exit barrier because of the large capital investment that you need to make to enter the industry.

Threat of Substitute Products or Services
Rate of Force: 3 (Moderate)

There can be various substitutes in the paper product industry depending on the application. Packaging for example could have many substitutes such as glass, metal or plastic. For applications such a printing and writing, there are very few viable substitutes. The construction industry, which in many cases uses wood products, could use alternatives such as stone, plastics, metals or glass. “There is an increasing demand for ecological’ products to be used in construction, meaning that forest products are becoming increasingly popular.” This demand could negatively affect the paper industry with the rising cost of wood, which is the main raw material in making paper. Lastly “expanding electronic communications are hurting the print market.” As magazines and books are now becoming available in E-reader format certain areas of the paper market are experiencing a sharp decline in sales as their customers prefer a digital format to digest content. As time goes on we will better understand how much the E-Reader market will hurt demand on this particular piece of the paper market.

Bargaining Power of Buyers
Rate of Force: 4 (Moderately - High)
3 Buyer Purchases a Large Proportion of the Seller’s Product
1 Buyer Has the Potential to Integrate Backward
6 Alternative Suppliers are Plentiful
5 Changing Suppliers Cost Very Little
1 The Purchased Product Represents a High Percentage of Buyer’s Cost
4 A Buyer Earns Low Profits and is Cost Sensitive
6 The Purchased Product is Unimportant to the Final Quality

The use of paper has a wide range of uses. It can be used for packaging, printing, sanitary purposes, etc. Since paper is basically a commodity based product, there isn’t much opportunity for a large company to dictate price. There are certain companies possibly in the construction area that could potentially influence price by their large purchasing power. The possibility of a potential buyer to integrate backwards would be difficult to impossible due to the large capital costs of operating a plant.
As previously discussed, paper is considered a commodity and changing suppliers has minimal cost effect on the supplier as well as the importance towards the final quality of the product. The products that the Global Paper Industry produces usually represent a low percentage of total buyer’s cost. Since paper has a diverse use to companies of both high and low profitability it is difficult to determine their price sensitivities.

Bargaining Power of Suppliers
Rate of Force: 1 (Moderately - High)
1 The Supplier Industry is dominated by a Few Companies
1 Its Product or Service is Unique
1 Substitutes are Not Readily Available
1 Suppliers are Able to Integrate Forward

The main suppliers to the Global Paper and Paper Products industry are logging companies and electricity providers. The logging industry is a mature industry that consists of many small family operated businesses that typically employ a staff between 30 – 40 individuals. The raw material that they sell to their buyers, tend to have little differentiation. “Market players can seek out cheaper and more flexible deals and will be prone to switch suppliers if better priced offerings are available.” Additionally, several of the largest industry leaders have begun to reduce reliance on suppliers through backward vertical integration by managing forestry plantations, selling raw timber materials and other downstream wood products. The Global Paper and Paper Products industry are also large consumers of electricity in order to produce their products. Domestically, electric companies are considered highly concentrated without switching opportunities. Internationally, electricity markets are considered more liberal with a wider choice of suppliers. Some paper product companies also through backward vertical integration have begun to generate their own electricity.

Relative Power of Other Stakeholders
Rate of Force: 5 (High)

The Global Paper and Paper Product industry is considered a highly regulated industry. In the United States they are watched by the Department of Justice when issues concerning trade arise. Federal environmental regulations – primarily the Endangered Species Act and the Clean Air and Clean Water Acts, which have an impact on the Paper Industry, are regulated by The Environmental Protection Agency.
Besides government regulations, the Global Paper and Paper Products are also self-regulated through Non-Governmental Organizations such as the AF&PA. All members of the AF&PA, must comply with the programs and guidelines of the Sustainable Forestry Initiative Program (SFIP). This program measures such areas as sustainable forestry, forest and health productivity, legal compliance, protecting special sites, and continual improvement.

APPENDIX

Ibrahim, Alan. “Paper and Paper Products”. Wikinvest.com. Wikinvest. No Date. 3/8/12. http://www.wikinvest.com/industry/Paper_%26_Paper_Products

Glazeman, Gail S.; Allsop, Myles. UBS Investment Research 2012: 26 Pages: 5 March 2012

Sommer, Ron. “Paper & Paper Products Industry: Two Companies Stand Out”. SeekingAlpha.com, SeekingAlpha.com, 30 January 2011. Web. 8 March 2012.

Ehmke, Cole; Fulton, Joan; Akridge, Jay. “Industry Analysis: The Five Forces”. Agricultural Innovation & Commercialization Center, Purdue University. September 2004

Porter, Michael “The Five Competitive Forces That Shape Strategy”. Harvard Business Review. January 2008. Pages 28

Unknown “Applying Michael Porter’s Five Forces to Equity Investing” Cautiousbull.com; Cautiousbull.com http://cautiousbull.wordpress.com/2010/11/04/applying-michael-porters-five-forces. 11 April 2010. Web. 8 March 2012.

Allsop, Myles. “European Paper Sector Weekly Digest” UBS Investment Research 2012: 20 Pages: 6 March 2012

Unknown. “Industry Profile: Global Paper & Forest Products”. Datamonitor April (2011): 30 Pages

Benway, Stuart J. “Industry Surveys Paper & Forest Products”. Standard & Poor’s February (2012). 43 Pages

--------------------------------------------
[ 1 ]. Datamonitor, Page 17
[ 2 ]. Datamonitor, Page 17
[ 3 ]. Benway, Stuart J. “Standard & Poor’s Industry Surveys Paper & Forest Products”. Page 1
[ 4 ]. Datamonitor. Page 18
[ 5 ]. Benway, Stuart J. “Standard & Poor’s Industry Surveys Paper & Forest Products”. Page 11
[ 6 ]. Datamonitor, Page 16

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