Corporate Strategy of Resolute Forest Products Inc - Research Paper Example

?RESOLUTE FOREST PRODUCTS INC 0 Executive Summary Resolute Forest Products Inc finds itself in a very unique and peculiar global competition that goes beyond inter-corporation competition. This is because as a leading paper producer, the company is in fierce competition with other external phenomena such as the reduced dependence on paper in the current generation we find ourselves in as compared to what prepared before the 2000s. The reduced dependence on paper can generally be attributed to the advent of the electronic mailing, electronic ticketing, electronic billing, and electronic receipt eras that we find ourselves in. This competition, together with what the company faces from industry competitors however does not mean the company should accept defeat and be content with little performance. Where there is competition, there is always the need to devise a competitive strategy that can guarantee competitive advantage for the company. It is in line with this that a comprehensive company analysis is necessary to identifying the current market position of the company, understanding ways in which the company has responded to the competitions that it is faced with, what the weaknesses and strengths of the company has been in its quest to be competitive, corporate strategies that can work best for the company, and a comprehensive financial assessment for the company. Presently, Resolute Forest Product Inc can be said to be at a position where the company has failed to maximise its potential on the global economic competition. As a result, even though the company continues to record increases in revenue and operating incomes, these have not been translated into net income, total assets, and total equity. 2.0 Organization Overview Resolute Forest Product Inc is the outcome of a merger between Bowater and Abitibi-Consolidated, which took place in January 2007. The company is mainly into the manufacturing of pulp and paper and is headquartered in Montreal, Quebec, Canada. Noting the importance of supply chain management to the company and the devastating consequence that can be associated with shortages in supply of raw materials, the company has as part of its major corporate strategies to operate and manage its own forest base that is responsible for supplying the company with its raw materials (Kanter, 2012). In line with this, the company boasts of owning an approximate value of 14.9 million hectares of forestland in North America as at the end of 2011 (Kim, 2011). This has generally being a workable strategy that has made the company to become recognized with efficiency in meeting demand from consumers. With growing concerns on global warming and the need to reduce the emission of greenhouse gases, Resolute Forest Product Inc pledged its commitment to this call in November 2011 when it became a member of the World Wildlife Fund’s Climate Saver’s Program (Chen, 2012). Together with other stakeholders and members therefore, the company is in a joint course to helping reduce greenhouse gas emission by 65% by 2015. The operations of the company have not been free from lawsuits to and from the company. For example in May 2013, The Star (2013) reported of a $7,000,000 defamation lawsuit filed against Greenpeace Canada and some of its employees for alleged interference with economic relations with their customers (Aulakh, 2013). Greenpeace Canada has however seen the lawsuit as a mere attempt to for Resolute to launch a Strategic Lawsuit Against Public Participation (SLAPP). 3.0 SWOT Analysis Strength Weaknesses 1. The company has a very reliable raw material base that makes the dependence on suppliers very limited. 2. Reduced dependence on suppliers means the company has sufficient savings on external spending that minimized the cost of doing business 3. The company commands very high annual revenue and operating income that makes it have very strong competitive urge over its competitors, knowing that diversification and other means of raising funds for the company with its revenue is easily possible. 1. Resolute has not been able to maximize its market potentials fully yet. This has lead to a non-matching revenue level with profitability. 2. There exists several opportunities for the company to go into active diversification to expand its income and market share but this has not been done yet as the company still focuses exclusively on market pulp and newsprint. 3. The employee strength of the company, which stood at 10,000 people as at 2011 has been criticized as being virtually inadequate for making the company meet most of the demands it is faced with. Opportunity Threat 1. The company is situated in a less active competitive environment, which is the North American market, as there have been found to be major competition for the pulp and paper industry in Europe and Asia (Bremmer, 2013). 2. Resolute has often been regarded as a friend of the state as it has often won most of the large scale contracts from the government sector (Kanter, 2012). 3. Resolute has a competent legal that protects it against various lawsuits that could arise from their business operations, mainly with regards to the use of forestlands. 1. The shift from excessive dependence on paper for various activities such as letter writing, receive preparation and billing is a threat to the company. 2. A refusal of the company to actively expand to new markets outside of North America has made other competitors establish brand equity ahead of Resolute. 4.0 Porters Five Forces One important paradigm that can be used by Resolute to identify its competitive intensity as well as its attractiveness to the market is the Porters Five Forces. The components of the forces as prevails for Resolute have been outlined below. 4.1 Threat of new entrants In a very current research on the lucrative nature of the pulp and paper industry to new entrants, Kim (2011) found that not too many companies look to this industry for expansion and alternative growth purposes. The simple reason given by respondents was that they do not find a very bright future for this industry as the face of computers is quickly taking over the industry. Based on this, Resolute can be said not to be endangered by threat of new entrants. Should such entrants come also, Resolute can boast of having the kind of brand equity especially in North America to withstand the threat that the new entrant would pose. 4.2 Threat of substitute products or services The threat of substitute products and services remains the company’s wildest threat in its current business orientation. This is because there has been a major shift in several aspects of paper use to the use of electronic platforms. This threat can be traced to the birth of software, which came with softcopy syndrome. Today, much of the things that can be done with a paper can be substituted for much safer products and services such as electronic storage. Issues of safety of paper works remains a threat for the company and the need for substitute products that guarantees such safety against fire, water and theft. 4.3 Bargaining power of customers (buyers) The main buyers of products from Resolute Forest Product Inc are corporate organizations and institutions and some governmental agencies. According to reports, even though the company depends on individual buyers, these individual buyers constitute less than 19% of all sales made (Pelle, 2012).). In line with this, it can be said that macroeconomic factors that often deny ordinary indigenes of sufficient bargaining power does not affect the company directly. With the corporate organizations, institutions and government agencies also, most of them buy from the company as retailers who bill out end consumers on the receding cost of products (Chen, 2012). In effect, these people have not had challenge with bargaining power, knowing that the consumer will always bare the final cost of products. 4.4 Bargaining power of suppliers Resolute Forest Product Inc is its own supplier of raw materials for over 60% of all forest products that the company uses (Bremmer, 2013). This means that there is much reduced dependence on external suppliers. However, the few suppliers who serve the company have often had problems with bargaining power, reporting of higher cost of raw materials, particularly forest products, which has partly been so due to policies put in place to product forestlands from depletion. Because of this, suppliers have often switched costs relative to the company’s switching costs. Where the company is not relying on its own supplies therefore, it is faced with very high cost of raw materials from suppliers. 4.5 Intensity of competitive rivalry There are several competitive rivals for Resolute Forest Product Inc. The terms of measurement of intensity of the competitive rivalry of these competitors is however highly varied. For instance whereas Resolute is very strong in North America and so does not count itself as being threatened with competition from that part of the world, other competitors are more visible in other markets, particularly Europe and Asia. Unfortunately, there exists a larger market in the areas the company has not really focused on competitively, meaning that Resolute is losing out in terms of global brand equity when compared with its international competitors. 5.0 Corporate Strategy The corporate strategy of Resolute is directly focused on the corporate or business outcome of the company. This is because according to the 2012 Annual Report of the company, the corporate strategy of the company was defined as “a gradual retreat from certain paper grades, and using our strong financial position to act on opportunities to grow and diversify” (p. 7). Clearly, this is a corporate strategy that is focused on the differentiation strategy to business competitiveness, where the company sets itself apart from competitors through the production of high quality and market differentiated product lines. This corporate strategy is founded on the basis maintaining average market cost and prices instead of reducing cost. But knowing that there shall be consumers who shall be more concerned about the cost of products, the company pays such consumers off with the value they get from the differentiated products. In relation to the identified direct consumers of the company and their bargaining power, it would be said that the differentiation strategy will not be much of a disadvantage for the company, especially when the argument of cost leadership strategy being used by other competitors is raised. As spelt out in the Annual Report of the company, it aims to run this corporate strategy as a way of running for profits and not for tons. In effect, using the differentiation strategy would ensure that the company focuses directly on a market segment that will be able to afford its differentiated products instead of producing so many products that will eventually be left on the shelves for lack of value for consumer needs. 6.0 Business Strategy The business strategy of Resolute Forest Product Inc is structured around three major themes and this is according to the 2012 Annual report of the company. The first of this looks at operational excellence, which highlights the need for the company to set itself apart when it comes to issues of corporate governance and other forms of corporate dealings that affects external stakeholders rather than the internal components of the company. By this strategy, the company seeks to treat its stakeholders such as shareholders, suppliers and customers with excellence, knowing that these stakeholders are very instrumental in determining the financial inflows of the company (Pelle, 2012). The theme is internal governance related as it focuses on disciplined use of capital. This is a very important business strategy that has been promised to hold answers to most of the questions that Resolute has on its profitability. This is because even though the company has very huge revenue and operating income, this has not matched up with the company’s profits. Through the use of disciplined use of capital, the company will reduce most of its internal spending to ensure that the balance between revenue and expenditure is positive and in favor of revenue, so as to gain profits. The last business strategic theme of the company emphasizes on strategic initiatives, which are directly linked to the differentiation strategic corporate option in use by the company. What the strategic initiatives require from the company is a paradigm shift from most of the traditional ways and means through which business is run on a corporate level. 7.0 Financial Assessment 2009 to 2013 7.1 Income statement past 5 years (annual base) 2009 2010 2011 2012 2013 Net (loss) income including noncontrolling interests (in millions of dollars) $ 2,005 $ 1,875 $ 2,775 $39 $(36) From the data presented above, it would be noted that the company is on a downward trend as far as its annual incomes are concerned. This is because over the last five years, the only period the company recorded growth from one year to the other was from 2010, leading up to 2011. From that time, there has been decreases in income, getting even worse in 2013 when the company actually recorded losses. 7.2 Income statement current year quarters (2013) Source: Resolute Forest Products Annual Report The implication that the graph above gives is that the company has had no control over the flow of its income in the year under review. This is because there continues to be upward and downward trending in income for the year. What is particularly troubling is the fact that the company has recorded negative values for its income throughout the year. In comparison to the working income of the company, which shall be reviewed later, it would be noted that this is an imperfect match because the company really records higher revenues though it has not had reduced expenses to turn these into profits. 7.3 Balance sheet this year and debt issue Below is a detailed financial and operating statistics of Resolute Forest Products for 2012 and 2013 on a quarterly basis. Source: 2013 Annual Report The effect of the company’s poor income state is reflected on its total equity in the table above. This is because on a repeated course, the company has been recording declining total equity since the first quarter of 2012. This situation certainly needs correcting before the company’s total equity, which gives it commercial viability also runs into negatives. 7.4 Cash flow this year. Cash flow information for 2012 and 2013 on a quarterly basis. 2012 2013 Source: 2013 Annual Report The cash flow of the company seems to give much meaning and understanding to the company’s poor financial performance. This is because there is much internal spending that thwarts the gains that the company makes in terms of revenue. There are also external debts that are paid, accounting for higher expenditure. 7.5 Ratios 12 months Dec-31-2008 12 months Dec-31-2009 12 months Dec-31-2010 12 months Dec-31-2011 12 months Dec-31-2012 LTM 12 months Sep-30-2013 Liquidity Current ratio 2.3x 2.7x 4.3x 4.2x 4.1x 6.0x Quick ratio 5.1x 1.2x 6.5x 3.1x 2.7x 4.4x Leverage Debt to Equity 37.8% 57.1% 52.6% 67.8% 82.2% 63.7% LT Debt/Equity 32.4% 65.4% 49.6% 73.5% 72.7% 59.4% Profitability Return on Equity % (31.3%) (13.4%) (3.6%) (16.3%) 1.2% (12.3%) Based on the flow and trend of revenue and expenditure for the company, it is forecasted that unless a very pragmatic set of steps as exemplified in the recommendations below are taken, the company will continue to record losses and negative values on its assets for the next five years. 8.0 Recommendation The report above can be said to be a very comprehensive diagnosis of the current state of Resolute Forest Product Inc from inside out. This is because it tends to reflect on the positives and the negatives that exist with the company. Based on the various components of the analysis of the company, there are three major recommendations that will be made for the company, going into the future. The first of this is for the company to continue its focus on corporate governance, which makes it a State and Corporate level paper company. This is because due to the credence that the company gives to corporate governance principles and practices, it continues to be the company that state institutions and other corporate bodies look to when it comes to business transactions. If this strategy is maintained then the revenues of the company from these areas will continue to go up. Secondly, it is recommended for the company to have another look at its internal spending. This is because even though there is a strategy aimed at the effective use of the company’s capital this has not been done very effectively. The result of this is that the company refuses to record a significant relationship between its revenues and profits. Even though revenue levels continue to go up, profitability has not followed up in an even charter. Finally, it is recommended for the company to take up massive expansion outside North America. Even though the company operates as a worldwide company, its focus on markets outside North America has not been as could guarantee profitability when compared with other competitors. References Aulakh R (2013). Quebec forestry company suing Greenpeace for $7 million. http://www.thestar.com/news/canada/2013/06/24/quebec_forestry_company_suing_greenpeace_for_7_million.html [15th December, 2013] Bremmer, I. (2013) ‘Managing risk in an unstable world’, Harvard Business Review, 83 (6), pp.51-60, Business Source Premier Chen, Y.C. (2012) ‘Why do multinational corporations locate their advanced R&D centres in Beijing?’, Journal of Development Studies, 44 (5), pp.622-644 Kanter, R.M. (2012) ‘Transforming giants’, Harvard Business Review, 86 (1), pp.43-52, Business Source Premier Kim, R.B. (2011) 'Wal-Mart Korea: challenges of entering a foreign market', Journal of Asia-Pacific Business, 9 (940), pp.344-357 Pelle, S. (2012) Understanding emerging markets: building business BRIC by brick. London: Sage. Resolute Forest Products Inc. (2013). 2013 Financial Summary. Accessed from http://www.pfresolu.com/uploadedFiles/Investors/Financial_Reports/RFP-Q3-2013-Financial_Summary.pdf [15th December, 2013] Read More