Halden Zimmermann | Stermon Mills Case Analysis Part 2

The acquisition strengthened GP’s full line of uncoated papers and added paper distribution and envelop converting businesses. GP matched International Paper’s yearly-uncoated fine paper capacity by starting up a new high production machine in mid 1991.

Stermon Mills faces a number of threats that must be addressed in order to sustain long-term market share. These include:

Potential Entrants- To be able to compete in the paper industry, new entrants will have to have the financial resources to invest in new, state-of-the-art paper machine.   These newcomers will have to ensure their company’s efficient operations to mitigate the depressed prices and reduced profitability.

Rivals- Stermon’s major rivals are the top 10 paper mills which include International Paper, Georgia-Pacific, Champion International and Boise Cascade. There are 10 major rivals who have competitive advantage from a cost standpoint. In addition market share is controlled by price and quality.

Substitutes- Most of the producers may be considered substitutes for each other’s products. The only difference is that one might have a preference for a difference based on price if the paper is very similar in composition and usage. It is also possible that the need for paper may decrease due to the increase in the use of electronic file usage, however, it may not significantly decrease usage of paper.

Government- Assuming that a secondary market is created from a government mandate requiring the recycling of fine paper, sourcing of fine recycled paper will be easier for paper mills and better for Stermon Mills.

Buyers- The growth in information processing by the office and business segment has driven the increase in demand for fine paper. These clients have a strong bargaining power over the mills as a result of the increased competition among suppliers and the excess capacity faced by the industry.

Suppliers- The high demand for recyclable paper has resulted in the need for fine papers that contained significant amounts of recycled fiber. Sources of these types of paper are offices and businesses that use high grade paper. Paper mills will have to look into ways of better sourcing these fine papers from consumers and businesses.

Recycling of office and business paper may have been an excellent idea, however, the process is technically and logistically challenging and may not offer any benefit to the company through any cost savings.

Business Strategy

Plants in the paper industry are either “integrated” or “paper only” plants. The Stermon Mills plant is an integrated, process-focused plant, which means that it has a pulp plant on site. It does not ship in dried pulp from outside like the “paper only” plants do. Exhibit 3 of the case shows that a central pulp mill supplies machine #1 through #4 directly at the plant site. These mills are also located near large water supplies as well as trees for its production. Pine trees supply long-fiber pulp for strength and deciduous trees supplied short-fiber pulp for smoothness and consistency. The ideal recipe for paper is to have around 50% of each type of pulp.

 

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