Arctic Timber AB – Strategic Planning for a Proposed Product Mix Policy

Introduction

Before an analysis of the existing facilities to decide on the proposed product mix for the future, it becomes necessary to have an overview of the ‘Strategic Leadership’ which has contributed much to the growth of the division in terms of new product development as well as the improvement in the profitability of the division.

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Strategic Leadership

Strategic leaders are those people responsible for the design and execution of strategic management processes. Strategic leaders play a critical role in the efforts of a firm to achieve desired strategic outcomes. Decisions that strategic leaders make include how resources will be developed, at what price they will be obtained, and how they will be used. Critical to strategic leadership is the organizational culture (Hitt, Ireland, and Hoskisson, 2005). This refers to the set of ideologies, symbols, and other values shared throughout the firm and that influence how the firm conducts its business.

Given the importance of strategic leaders to a firm’s success, the selection of those to fill these positions is critical. Perhaps not surprisingly, hard work, thorough analyses, a willingness to be brutally honest, a penchant for wanting the firm to accomplish more, and common sense are the pre-requisites for an individual’s success as a strategic leader (Shen and Cannella, 2002). In addition to possessing these qualities, effective strategic leaders should be able to think clearly and ask relevant questions to mitigate any issues that hinder the growth of the organization. This report from a study of the case of the Arctic Timbers AB – Engineered Woods Division has found these qualities of strategic leadership all through the functioning of the division which has helped it to grow against all odds.

Environmental Analyses

With a view to present a report suggesting a probable product mix that can be adapted to maximize the profitability of the division, We have made a careful analysis of the internal and external environment of the Timber industry in general and the OSB business in particular.

An integrated understanding of the external and internal environments is essential for firms to understand the present and predict the future (Zahra and George, 2002). The firm’s external environment is divided into the general environment, the industry environment, and the competitor environment. The general environment is composed of dimensions in the broader society that influence an industry and the firms within it (Hitt, Ireland, and Hoskisson, 2005). The PEST analysis is an important tool that can be employed to assess the external environment. An important objective of studying the general environment is identifying opportunities and threats. Compared to the general environment the industry environment often has a more direct effect on the firm’s strategic competitiveness and above-average returns. The industry environment and the intensity of competitiveness in the industry can be gauged by using Porter’s Five Forces Model.

PESTLE Analysis of Timber Industry

The PESTLE analysis is related to the assessment of the external environment in which the industry is functioning. This analysis will assess the impact of the political, economic, social, technological, and legal factors on the industry. The analysis is presented below:

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Political Environment

The influence of the political factors in the way of change in the regulatory measures and the attitude of the current government will largely determine the growth and success of any industry and the players within that industry. If the government is stable and a staunch supporter of the industry then there will be ample chances for the industry to grow. In the case of the Timber industry, there is complete support for the industry and the political environment is conducive for the development of the industry.

Economic Environment

Under economic environment factors the elements like current taxation levels, prevailing inflation rate, the position of the balance of trade and exchange rates, the level of unemployment, the changes in interest rates, and availability of finances affect the functioning of the industry. Based on the application of these factors in the global context, the economic environment can be assessed as more favorable for the development and growth of the industry. Even though there were some adverse factors affecting the industry in the form of the decline of the construction industry three years back the economy has bounced back to provide a favorable climate for the development of the timber industry.

Social Environment

Changes in the values and lifestyles, changes in values and beliefs, changing patterns of work and leisure, demographic changes, changing mix in the ethnic and religious background of the population – all will have their influence on the sustenance of the industry. In the global context, all these factors work to the advantage of the timber industry as the changes in lifestyle and values of customers bring more business to the builders and constructors. Changes in per capita income and increasing desire to have own homes are contributing to the growth of the timber industry in Europe as well as globally.

Influence of Technological Factors

There are technological changes happening every day in almost all the industries which influence the development of the industries. Technological developments bring about changes in production technologies and processes. They also change the ways in which various services are provided and especially with the introduction of broadband connectivity the commercial world has undergone a wide change. All these technological developments have an impact on the functioning and growth of the timber industry in Europe. The advanced systems of Enterprise Resources Planning (ERP), Customer Relation Management (CRM), and Supply Chain Management (SCM) have contributed to the systematic enlargement of the industry not only in Europe but also globally. Several new technologies for the development of new kinds of resins and other bonding materials have been developed to suit the new product developments which help the growth of the industry at a rapid pace.

Legal Environment

The legal environment prevailing in a country largely determines the ways in which any business is conducted. The legal environment also regulates and monitors the conduct of the business so that the interests of all the parties connected with the businesses are taken care of. The legislation may relate to the sale of goods, contracts, unfair selling practices, health and safety measures of the employees, other laws relating to employment, regulations governing the competitive environment, and lately the measures for protecting the environments and natural resources of the country. As far as Europe is concerned there is a completely developed legal environment, and the regulatory measures have been pruned over the period to meet the requirements of an organized industrial development and hence there is no hindrance to the conduct of the timber business with respect to the legal environment, but for the legal battle, the division had to face to get the approval for 50 year warranty period for the ArcTech product.

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Environmental Issues

In fact, this is the one area that can always act as detrimental to the growth of the industry as the major raw material for the manufacture of the OSB products is wood which is subjected to severe environmental restrictions and governmental regulations. Often the environmental groups object to the felling of the trees for commercial purposes. However, since the OSB product uses wood of lower quality and is insignificant from an environmental point of view this may not affect the progress of the industry to a large extent.

The analysis of the external environmental aspects points towards a healthy atmosphere for the growth and development of the timber industry in Europe as well as across the world.

Porter’s 5 Force Analysis

The Five Forces Model determines the external competitive threats that act on the market environment of any particular industry. The model was developed by the American Management scholar Michael Porter and the model summarizes the extent to which the external forces acting on the industry assess the intensity of competition. The Five Forces Analysis of the OSB market in Europe takes the following form:

Threat from New Entrants

This force acts when the new entrants could enter the market without difficulty and pose competition for an existing business. The greater the ease with which new entrants enter the market the higher is the level of competition. The capital cost of entry, the scale economies, product and price differentiation, switching costs, the expected retaliation from the existing player, legislative measures, and access to the distribution channels are some of the factors that influence the ease of the new entrants. In the case of the OSB market, the capital cost of entry is not very high unless the idea is to start a chain of manufacturing locations in various geographical areas. In general, the starting of a moderate level of operations does not pose a problem of higher initial capital outlay. The economies of scale do matter in the OSB industry as the purchasing of goods in bulk quantities directly from the manufacturers will give the dealers and builders some price advantages which will go to increase the profitability of the company.

This aspect is a deterrent for the new entrants since to operate on a large scale it needs a higher capital investment initially. The product and price differentiation does not act as a barrier to the new entrant on a medium scale. There is virtually no switching cost for the customers as they can easily change the OSB product to the traditional plywood or any other competing product. Hence the switching cost acts as a barrier to entry to the market as the new entrant should be sure of the product quality, service to the customers, and price points so that he does not lose the customers. The access to the distribution channels may affect the entry to the market, as to establish a working relationship with the builders and dealers. However, this aspect is not a material one to affect the entry of new firms. On an analysis of the above factors, it appears that there are no serious deterrents for the entry of new firms into the market and hence the competition from this force can be reckoned as from moderate to serious.

Bargaining Powers of Buyers

This is the serious competitive force acting on the OSB market. The consumers represent the national chains, regional chains dealers, and the builders apart from the end-users. The buyers hold the supreme power in deciding the success or failure of any firm. Since they have alternative sources of supply the intensity of this force acting on the competitiveness of the OSB industry is very great. Any variation in the price or quality will induce the customers to look for an alternative source of supply, as there is no switching cost involved when the buyers change the OSB product to any other particleboard product like plywood. The confidence level of the customers on the price, quality, and utility needs to be established to win. Hence this force acts very seriously on the OSB products.

Bargaining Power of Suppliers

The competitive forces acting on any industry will be affected by the concentration of suppliers and the degree to which the products can be substituted by other sources of supply. The other factors that determine the bargaining power of suppliers are the level of importance the buyer attaches to the supplier and the switching costs for the buyer to source from the alternative sources of supply. Hence the same issues that affect the bargaining power of buyers will become applicable to the suppliers also. Applying these principles in the case of the OSB market the wood and log suppliers represent the core group of suppliers. Although there can be no concentration of suppliers of wood, there can be pressure built on the suppliers due to environmental groups and governmental regulations affecting the supply sources. To this extent, the suppliers to the OSB industry have bargaining power and the force can be reckoned as serious as wood is the only major raw material that goes into the production of the OSB product.

Threat from Substitute Products

If there are similar products that can be used as a substitute then the demand for the product will increase or decrease as it moves upwards or downwards in price relative to substitutes. OSB market is very price sensitive and there is a variety of products available which makes the threat from the substitute product, the important competitive force acting on the industry. Hence it becomes important that the manufacturer maintains the price and quality of the products lest there will be a shift in the consumer demand to the plenty of alternatives available in the market. The switching costs to the buyers to the alternative products are also not heavy which makes this force a serious one in determining the competitiveness of the industry.

The extent of Competitive Rivalry

The impact and intensity of all the above four forces will determine the competitiveness of the OSB market. The competitiveness of the market will also be affected by the following factors in addition:

  • The number of competitors present in the market and the degree of their concentration
  • The rate at which the industry grows
  • The cost structure of the firms
  • The exit costs. When the exit costs are high the firms would like to stay back in the market by accepting lower margins.

The above factors can be applied to the OSB industry, to determine the competitiveness of the OSB market environment. There are a number of competing firms present which makes the industry highly competitive. There is a rapid growth in the industry which invites new entrants and hence there is high competition exists in the industry. Since the fixed costs are low there are no price adjustments required which makes the competition intense. However, since the exit costs are low there will be less competition since when faced with a difficult financial situation the firms may not hesitate to exit, due to lower exit costs.

As a measure of analysis of the internal environment of the company a SWOT analysis has been made and reported below:

SWOT Analysis

The Strengths, Weaknesses, Opportunities, and Threats of the Engineered Woods Division are presented below as analyzed by this report.

Strengths

  • Experienced leaders.
  • Good reputation for the commodity products of Arctic Timber AB.
  • Virgin Product line – in the OSB products.

Adoption of a new practice in the structured panel industry in the form of ArcTech Flooring – an OSB product using new resin technology which is an innovation to solve the inherent problems of the OSB line products

Weaknesses

  • Weak leadership ability of the President
  • Lack of confidence of Senior Staff in the top management
  • Lack of teamwork among senior staff
  • Inflexible marketing approach and no sales promotion
  • Poor customer approach
  • Outdated manufacturing facilities and increased production costs
  • Lack of support for research and developmental efforts
  • Quality issues with products being supplied to major customer

Opportunities

  • Prices of the competing product were high
  • Being a new product wider market opportunities exist
  • The new value proposition for the ArcTech product

Threats

  • Products opposed by environmentalists
  • Legal hurdles in getting the new 50-year warranty scheme
  • Wide price fluctuations in the OSM product market prevented consistent pricing policy of the firms
  • Lack of confidence of the customers and opposition from retailers due to limited supply capabilities of the OSB products

Although most of the weaknesses have been identified and removed since the division is at the crossroads to decide on the adoption of a future policy with respect to the proportion of the production and marketing of commodity and specialty products the following issues need to be considered along with the impact of the external and internal environment on the industry and the company before a final decision is taken.

Commodity Products

In the case of the commodity products, the division carries certain distinct strengths which need to be considered and capitalized. They are:

  1. Because of the continued production over a long period the technology for making the product has more or less been mastered by the division which needs to be used for maximizing the profitability of the company.
  2. Commodity products like Arctic Blue have won the confidence of the customers over the period and have a strong brand loyalty which will help improve the profitability.
  3. Presently the market for the commodity product is high and that for the OSB product is somewhat at the lower ebb. Therefore it would be advantageous to utilize the core production capability of the division in manufacturing and marketing the commodity product.

The only issue with the commodity is the high cost of production for making the commodity product. A reduction of the costs can be attempted by reengineering the existing manufacturing facilities and a closer look at other cost reduction areas.

Specialty Products

This report identifies and appreciates the efforts put behind the development and introduction of the specialty product of ArcTech an OSB product that is quite distinct from the traditional product line. The market established with great efforts should be sustained and the future of the division lies only in this product. The temporary dip in the sales should not be an exclusive factor to decide on the discontinuance or reduction in the proportion of this product. Furthermore, the profit margin of this product is high as compared to that of the commodity product.

Conclusion

Considering the external and internal analyses and other factors associated with the performance of the Engineered Woods Division of Arctic Timbers AB, this report concludes that the division:

  1. should continue with the existing proportion of 50 percent commodity products (Arctic Blue) and 50 percent specialty product (ArcTech) for the time being
  2. should improve the proportion of the ArcTech once the market for this product improves making the proportion of this product to 70 percent and the proportion of the commodity product reduced to 30 percent in view of the higher margins in ArcTech.
  3. should take immediate steps to make a reengineering of the manufacturing facilities to modernize the plants so that the cost of production of the commodity product Arctic Blue can be reduced

References

Hitt A Michael, Ireland R.Dunae and Hoskisson E. Robert (2005) ‘Strategic Management: Competitiveness and Globalization’ Edition VI Thomson South-Western.

Shen W. and Cannella A A (2002) Revisiting the Performance Consequences of CEO Succession: The Impact of Successor Type, Post Succession Executive Turnover and CEO Tenures Academy of Management Journals Vol.45 pp 717 – 733.

Zahra S.A and George G (2002) ‘International Entrepreneurship: The Current Status of the Field and Future Research Agenda’ in Strategic Entrepreneurship Creating a New Mind Set Oxford UK Blackwell Publishers Pp 255 – 288.

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