EXYSTENCE NoE
Seminar on 12 Nov 2004, Helsinki

Vice President Hannu Siikala, Business Development, UPM-Kymmene Corporation, Finland.

Managing Change in Global Business

It's a great challenge and a pleasure to be with you to have a dialogue about change in global business. I would like to emphasise the word 'dialogue' so please ask questions and make comments. At the end of the presentation I will also reserve some time for discussion. I have divided my presentation into three parts. First I would like to describe the global business we are in. The second issue that I will tackle is the UPM paper company and finally I will move to the key point of the presentation which is some thoughts about strategy, management of a global company and how to survive in a hostile environment.
So let's first consider the paper industry or forest industry where the value of production is roughly 470 million US dollars and out of that printing and writing paper is 25% and UPM is mainly focussing on printing and writing papers. The US is still today the biggest producer and biggest single market country, but China is the second biggest and its production is growing rapidly though most of that production is still paper board rather than printing and writing papers. It's a production that is very much based on straw pulp rather than wood.
If we look at the competition from 1960 to the present time we can see that Scandinavian companies, particularly Finland and Sweden have greatly improved the efficiency of paper machines. The number of paper mills in the States is 450 whereas we have 46, but our production capacity is close to three hundred thousand tonnes whereas in the United States it's less than 200. If you look at the leading companies in 1992 and ten years after, the picture is completely different. Local companies have completely disappeared from the list especially in the US and if you look at the more demanding paper industry the two biggest companies are Finnish companies of which UPM is one. Maybe one reason for this development is the strong cluster in Finland where we have three major paper companies, a leading paper machinery supplier, two big paper chemicals companies and a research centre. So there's a lot of cross fertilization in the industry. However, if you look at education in Europe for the year 2000 it's rather frightening picture. In Finland we are educating 200 paper engineering graduates whilst in the rest of Europe it is less than nine.

Questioner 1: Can you tell us in which countries you have activities and what kind?

Hannu: We have paper mills in Finland, Germany, France, UK, USA, Canada and China but basically there are only two global paper companies in the world. Other companies are large but regional and concentrate on North America.

Questioner 2: One thing that seems to follow from that question is that it is not so much paper that is going to disappear, but whether the printed word will reduce in terms of books, papers and journals because information will be available through the Internet. There's a shift to personal printing and I'd be interested to hear your view on that.

Hannu: After the dotcom boom young people in the company warned us of a slump and we put a lot of effort in studying this issue. Looking back from now, paper demand has been growing quite steadily and very much in line with the GDP (Gross Domestic Product). So there are no break points in the history and consultants estimate this kind of growth will continue. We talk about a 2.6 % average growth and it's still growing globally, but diving deeper into the analysis we see that markets are changing completely. There are well proven emerging markets in the Far East, Latin America, Africa and Eastern Europe including Russia and that's a major shift.
Something we have been particularly looking at is the end user of paper and we can see that some end users such as the traditional newspaper trade, which has been one of the biggest in the States is declining. At the same time there are certain end users growing which are D.T.P related and there is also a big market in specialist magazines, supplements and free newspapers. We have to follow the different customers' paper quality and buying habits. Cut size or copy paper, for example, is a big market but it may be reaching maturity.

Question 3: Are there any (end uses) in their infancy?

Hannu: We have one for books, but it's a much dispersed market in that there are a lot of end users. The whole supply chain of books may change. Today the publishers print huge amounts of books which they store. They send some to dealers who also keep a store and eventually surplus books are sold at a low price. Now one alternative to that could be that retailers print to order and I personally think that's a more likely alternative than electronic books As some people have commented: 'Who wants to scroll through a whole book?
So print today is still dominant even though there is strong growth in electronic media advertising. The record shows that every time some new technology in the field of communication emerges, consumption of paper still increases, though of course the future now may not be like the past. Though paper printed media has survived for five hundred and fifty years after Gutenberg we must be careful to think anew what might happen in the next fifteen years and not underestimate the challenge of new media. Of course new technologies bring new services, but we have also to take account of human behaviour. My generation wants to read things on paper, but if our children have used computers from a young age that might be a break point. During the dotcom boom all our customers went to e-commerce, e-publishing and so on, but they didn't know how to make money out of it, so when we're talking about complexity we have to consider technology and human behaviour. We cannot study it as a direct relation because there are all sorts of drivers. That's why we have established a new media monitoring team which is multi-functional and networks with universities and other companies and reports a number of times per year to our CEOs.

Questioner 3: I think one of the problems is that the present generation of the directors of private companies and the public sector are living in a different world from younger managers.

Hannu: We have realised that problem and I'll come back to it. We have to think about all the challenges simultaneously. There are a few large players but we have new competitors coming from a world of different business ethics and financial thinking and we need to know how to compete. There are new markets, customers and requirements and new sources of raw material. Recycled fibre for example, has become more and more important. Because there is an access factor for remaining Finnish forests we are now going to Poland or Uruguay to get cost competitive fibre. There is also product differentiation and changing customer requirements, and last but not least, corporate responsibility is also increasing. That's the present world to which we have to match our business. It has a long history, but it is facing a lot of challenge.
Before I talk specifically about UPM are there any questions?

Question 4: What about human requirements?

Hannu: Good question. We are doing our best to train up more professional paper makers.

Question 5: What about the future environment? Will the forest be replaced?

Hannu: I think most of the forest will not be replaced but this issue is beyond my expertise.

Now I want to consider my own company which has a turnover of around 10 billion euros and, though we are global, three quarters of our turnover comes from Europe. We have twenty two paper mills and sales representation in 55 countries and around 2000 customers. Though we have a long history, we have only been UPM since 1996 after a merger of United Paper Mills and two big Finnish companies. In that short history we have implemented three different business concepts. The first was production orientation, the second was customer focus and today we are talking about business analysis.
The first one was about delivering paper at the market price and product excellence. The company was formed from very independent profit centres. Nearly all our mills were profit centres which in some cases competed badly with each other. Having a long history and focusing on production gave us confidence in what we call high technical manufacturing skills. But that was not enough; we could not just rely on machine efficiency and production orientation.
One big challenge was that the merger involved very different cultures. UPM was really very focused on the machines. All the text books say that if you make an acquisition or merger you should put a lot of effort into cultural integration but in the beginning nothing was done so after one year we had too many people, duplication was rife, and we were decentralised and chaotic.
There was also a lot of pressure from customers who were getting bigger and more global and not satisfied with the way the paper industry was treating them. They doubted delivery times, found us irresponsible to deal with and they didn't trust us to recommend the best product. This was what we got from customer interview and of course this was a shock for the management. Fortunately the comments were the same for our competitors so it was a comment on the service level of the whole industry. We saw we had to somehow change the rules of the game to create trust and customer satisfaction.
Thus we started the next business concept which was on customer focus with emphasis on global needs. It was a hard and painful change process, but at least our presidents were wise enough to see that it was not a change process that could be implemented and finalised overnight. It was started in January 1997 and it was estimated that it would last beyond 2000 and to a certain extent it's still going on.
Top management laid the foundation for change by collecting all kinds of information though even that was not easy because we were not in financial trouble, were making good money, and many people asked why we had to change.
We collected all kinds of customer information and management defined our strategic intent. The next nine months were spent in planning exactly what should change in our sales and marketing, our value offers to customers and our training. Actual change started in May 1998 and our strategy was the same for the entire company. We defined our purpose, mission, principles and values and corporate responsibility, but importantly we wanted our business to become the most attractive company in the industry both to our customers, our employees, our share-holders and to society. Global business theory and global development also means people development and we now feel that we are globally integrated. Our decision making is agile, and we can give a fast response to customers and to changes in the world. One of our core competences is customer and supply chain management which I believe demonstrates that the change process has succeeded. We have gone from fourth to first for customer service and similarly for sales, though we still have a bit of a challenge over the environment.
We now have to ask how we can utilise this market leadership in customer satisfaction. We have some insights and we don't believe that just growing and consolidating will give sufficient competitive advantage. We still need to integrate more with the customer and achieve customer-focused thinking. Whereas our previous approach tended to be along the lines that one way fits all, now we have carefully segmented our customers and are developing different business patterns for each.
Today we are entering this development phase and again it means big change mentally. Traditionally the paper industry attitude has been that we have technology and know how to do something and we then build a machine around that technology and when competition gets harder we add services. But the bottom line is that we need customers and we have to start identifying their needs and how we can help them to make more money. We then plan what products and services are needed. It is then you decide how you can accommodate them.
So I come to the question of how to survive in the modern economic environment. Yesterday I listened to Professor Donald (Salt?) who has written a book called Revival of the Fittest (?). It's a story of why good companies go bad and how good managers fix them and just because today we are good doesn't mean that we wouldn't become bad tomorrow. One of the things people say about companies that fail is that they didn't see change coming. That's not necessarily true. Most companies react. Even IBM which is close to bankruptcy saw their PCs and laptop computer business failing and reacted, but they reacted by doing what they did earlier but much harder and faster. This kind of sweating to ride the bicycle fast doesn't help. Managers are not all idiots and when good companies go bad most managers try their best. Everybody knows that there are down cycles, but the reason for deterioration is often that these companies are very strongly trapped with their commitments. That may seem a strange thing to say but I will try to explain. It is often the commitments and relationships with certain customers that can make us behave nicely even if the customers are no longer good for us. You have certain resources and processes which you don't want to get rid of and you have friends and values. At some previous time all these were very important, but the danger is that when the world changes we have difficulty changing these commitments. What I want to add to what Mika said is that the traditional way of planning is to analyse the past but this doesn't provide good strategies. As a company we have relied very much on strategic planning processes and what we are really calling for is insight and foresight to create good strategies.

Comment: One of our colleagues, Max Boisot, has said that a strategy walks on two legs: one is on plans and analysis and the other is on assessment of the unexpected and intuition. We have trained on the first leg for a hundred years and it's a very strong one, but the second is very weak.

Hannu: Exactly, of course we need these strategy tools and strategy planning, that's how we organise, but we need strategic thinking and decision making for when a new situation emerges. This kind of strategic thinking and this kind of opportunistic decision making, rely on a deep understanding of markets, customers, and the environment and of competition. What I've tried to do is to jump from a kind of data forecasting strategy development towards strategic management where futures are created and considered.
We have defined our futures strategic management as having three elements:

1. Continuous learning from everywhere. Every Friday a manager must close his eyes and think what he's learned, from customers, from competitors, from the environment and so on. We need business intelligence to help this learning and though it is often seen as just some kind of scanner system covering data you also need foresight to create different tools to help with the decision making.
2. Practice at CEO level of scenario worlds. What kind of world could it be and what kind of impact would it have on our business? This forces us to cope with new perspectives of say, competitiveness, which in the past has been measured from the customer perspective of price and service. Usually the time horizon is very short -three or five years maximum, but we have to look longer ahead at a twenty or thirty year horizon because forests in Finland may be growing to be cut in fifty years. So your reference for competition changes and your number of stake-holders increases and the elements of competitiveness increase. This is what business is all about in the future.
3. Though customer perspective is important, longer term, corporate responsibility will become more and more important. One of the biggest magazine companies main criteria in selecting a supplier is that it must have very high business ethics and be environmentally responsible. We would drop off the supplier list if we were not meeting their requirements. If we look fifteen or thirty years ahead there are NGOs (Non Government Organisations), whole countries and the United Nations, which may exert pressure. In the long run companies cannot survive if they are not treating their customers properly and do not have a sustainable approach to resources, in our case forests and energy in producing pulp.

Questioner 1: I firmly believe that the next technological paradigm will be self organising systems instead of the present rigidly pre-coded systems, so my question is: 'Do you currently have anything like that in your process or do you plan to have such technology?'

Hannu: To be honest I don't know. I'm quite sure that clusters generate such thoughts, but where we are today I'm not sure.

Questioner 1: Would you be interested in participating in a technological project where we would design a self organising distributive system or a self organising algorithm that could be used?

Hannu: I believe our company would be interested, but again that goes beyond my expertise. I can however give you some contacts.

Questioner 2: A Norwegian aluminium company actually manages to sell recycled aluminium to customers at a higher price than that supplied by a good materials supplier, because of their customer relationships and knowledge of their business. You could say that they have packed knowledge into their aluminium, so I was just wondering if you had conducted such tests with recycled paper and whether it was a possibility. The other question I have is: 'how do you see the stock of employees evolve from now into the future in terms of people who are directly involved in the production of paper and people who are into developing customer relations?'

Hannu: If I understand your questions right I will answer the second first. To date we have established ways of increasing knowledge within the company, for example, customer teams; people from traditional sales, logistics, IT, finance people and people from production. These are people who get a comprehensive understanding of the business, but also generate new ideas about customer service and how to develop better products. As far as recycled paper is concerned, we are not selling newsprint made out of recycled fibre cheaper than that made from virgin fibre because there are certain customers' special products where the demand is for recycled paper and in many cases it is because they want to be environment friendly.

Eve: Thank you very much. If I may I will just pull out some of the themes so that we can see them from a complexity perspective. You made the point about making the organisation most attractive to employees, customers, shareholders and society. I think that is important in that it involves all the multiple interests and how they fit into a social ecosystem. I think that is essential. Secondly you made a point that one size does not fit all and I think that's fundamental because we know from complexity that you cannot have one solution that is universally applicable and you made that point very well. You then talked about long term commitment which is looking into the future and the balance to that is that you cannot be trapped by your commitments. I think what you demonstrated there was the need to co-evolve with your changing environment whilst at the same time showing the long term commitment. You also talked about deep understanding, which I think is at the heart of what is happening. You cannot do these things mechanically. Lastly you talked about longer term corporate responsibility which brings us back to the first point which is actually caring about the social ecosystem. So thank you very much for a very insightful presentation.