Learning to Profit in

the New Normal

Prepared for

2012 Specialty Paper Conference

Frank PerkowskiBusiness Development Advisory

November 9, 2012

Fundamental Shifts Have Taken Place…….

�New Industry Structures and Dynamics

�Changing Technologies and Customer Solutions

�Disappearing Markets and Paper Applications

Why Do We Need To Talk About This?

2

�Markets Sorting Out Winners and Losers

�New Competitive Sets and Bases for Competition

�Changing Customer Expectations and Needs

�New Opportunities for Growth and Failure!

1. What has changed / stayed

the same?

2. How should specialty paper

Presentation Outline

3

2. How should specialty paper

companies respond?

3. Path Forward

What Has

Changed or

4

Changed or

Stayed the Same?

The World Has Changed Overnight!

�Electronic Media Growth

�Graphic Paper Declines

�Industry Shift to Asia / LA

�Declining US Paper Demand

�Recession Impact on Usage

�Nano Technology Development

�Globalization / Localization

� Asia / New Economy Growth

�Convenience Technologies

�Connected World

�Social Networking

�Smart Technologies

Macro Developments Industry Developments

5

�Nano Technology Development

�Paper / Plastic Interactions

�Secure Packaging Solutions

�Sustainable Materials Focus

�Third Party Certifications

�Renewable Energy Sources

�Industry Consolidation

�Company Repositionings

�Import / Export Growth

�New Wax / Plastic Alternatives

�Smart Technologies

�Increased Transparency

�Sustainability Focus

�New Energy Solutions

�Aging Populations

�Female Empowerment

�Health & Well Being

�Terrorism / Security

�Global Economic Collapse

�US Economic Decline

Paper Demand Has Shifted

100

110

120

130

US

Pro

du

ctio

n In

de

x (2

00

7 =

10

0)

Historic US Paper Production Trends by Selected Grade (1982-2012)

Total Paper Production

Other converted paper

Paper bag & coated / treated paper

All Publishing Papers

New

Normal

6

60

70

80

90

19

82

-01

19

82

-09

19

83

-05

19

84

-01

19

84

-09

19

85

-05

19

86

-01

19

86

-09

19

87

-05

19

88

-01

19

88

-09

19

89

-05

19

90

-01

19

90

-09

19

91

-05

19

92

-01

19

92

-09

19

93

-05

19

94

-01

19

94

-09

19

95

-05

19

96

-01

19

96

-09

19

97

-05

19

98

-01

19

98

-09

19

99

-05

20

00

-01

20

00

-09

20

01

-05

20

02

-01

20

02

-09

20

03

-05

20

04

-01

20

04

-09

20

05

-05

20

06

-01

20

06

-09

20

07

-05

20

08

-01

20

08

-09

20

09

-05

20

10

-01

20

10

-09

20

11

-05

20

12

-01

US

Pro

du

ctio

n In

de

x (2

00

7 =

10

0)

Source: US

Census Data

Pricing Trends Vary By Grade / Market

200

225

250

US

No

min

al P

rice

Ind

ex

(19

82

=1

00

)

Historic US Nominal Price Trends for Major Paper / Converting Grades

Packaging & Ind Converting Paper

Paperboard

Overall Paper

Printing & Writing Papers

Coated / Laminated Papers

All Commodities

7

125

150

175

20

02

-1

20

02

-4

20

02

-7

20

02

-10

20

03

-1

20

03

-4

20

03

-7

20

03

-10

20

04

-1

20

04

-4

20

04

-7

20

04

-10

20

05

-1

20

05

-4

20

05

-7

20

05

-10

20

06

-1

20

06

-4

20

06

-7

20

06

-10

20

07

-1

20

07

-4

20

07

-7

20

07

-10

20

08

-1

20

08

-4

20

08

-7

20

08

-10

20

09

-1

20

09

-4

20

09

-7

20

09

-10

20

10

-1

20

10

-4

20

10

-7

20

10

-10

20

11

-1

20

11

-4

20

11

-7

20

11

-10

20

12

-1

20

12

-4

US

No

min

al P

rice

Ind

ex

(19

82

=1

00

)

Paper Application Dynamics Changing

0.0%

1.0%

2.0%

3.0%

Av

era

ge

De

ma

nd

Gro

wth

Ra

tes

by

5 Y

ea

r P

eri

od

Specialty Paper Growth Rates by End Use Application

2006-2010 AAPC

2011-2015 AAPC

8

-3.0%

-2.0%

-1.0%

Av

era

ge

De

ma

nd

Gro

wth

Ra

tes

by

5 Y

ea

r P

eri

od

Winners and Losers in Specialty Paper

0.0%

2.0%

4.0%

6.0%

8.0%

Estimated Growth Rate Trends by Major Specialty Paper Grade

Sorted Based on Five Year Projected Rate

2006-2010 AAPC

2011-2015 AAPC

9

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

Art papers Kraft specialties Photographic base

Asphalt sat base Label facestock Premium cutsize

Carbonless Label release base Premium writing

Coating base Laminating base Security papers

Décor paper Latex sat base Text & cover

Direct thermal base Lightweight pkg Tissue pkg / wraps

Electrical papers Lightweight printing Wallpaper base

Filter base stock Medical / Hygienic Waxing base

Industrial sat base OGR treated Wide format inkjet

Specialty Paper Grades In Study

Competitive Dynamics Have Shifted

� Fewer but more focused / smaller competitors in many segments

� More disciplined pricing environments� Lower capital investment but… more

flexible / capable assets

10

flexible / capable assets� Better management / optimization focus� Less import threats in some markets

while export opportunities expand� Widening gap between commodity and

specialty solutions

Customers Have Different Needs

� More knowledgeable / informed� More sophisticated supplier selection /

product qualification process� Stronger emphasis on preferred

suppliers and relationship development

11

suppliers and relationship development� Consolidations have improved

operations / focus � Sustainability / environmental focus

resulting in new solutions� Increased global orientation

Changing Product Requirements

� Electronic substitution threat accelerating

� More customer SKU’s and increased targeting capabilities

� Increased cost focus due to economy� More integrated products / solutions

12

� More integrated products / solutions� Higher performing materials available� Need for more sustainable materials and

processes� E-commerce and electronics affecting

every aspect of product and delivery

How Should

Specialty Paper

13

Specialty Paper

Companies

Respond?

Re - Evaluate Your Business

Develop and implement successful business models by employing time - tested management practices that chart your future development activities …….

� Understand how the industry is changing� Respond to Industry structural shifts� Prune and develop new product lines� Develop both products and markets

14

� Develop both products and markets� Determine where the money is made in your industry� Invest strategically and selectively� Establish / develop your competitive advantages� Spur increased growth and profits through new products� Differentiate away from competition� Consider all paths to growth� Focus on solutions that solve the most critical problems……

Employ Time Tested Strategic

Planning Tools To

15

Planning Tools To Change Course

Understand How Market is ChangingAre your assets, activities, or both being threatened?

While most specialty paper markets are changing, only a few cases exist where assets

and activities are seriously threatened. In most cases, you need adapt to feedback and

incrementally change your strategic approach. Some markets (carbonless, white paper,

printing papers, text & cover) may require a more radical response.

16

Prune and Re-Develop Product Lines

Product lines should be

continually reviewed

and refined to maximize

profitability.

Specialty paper

companies need to

understand how their

products are

17

products are

strategically positioned

in order to maximize

profits

Most specialty paper

companies are too

focused on capabilities

and cost.

Develop Both Products and MarketsSub-performing specialty

paper companies must

expand into new markets

and /or products to survive

in the future.

The best approach is to

evolve the business into

new markets OR new

products

Ansoff Matrix

18

products

Doing both simultaneously

(diversification) is risky

and often fails

Even more risky is failing to develop new markets and products on an ongoing basis.

Determine Where the Money is Made

High revenues and shares do not translate to high profit margins…..

Analysis of other industries such as autos, airlines, and personal computers show that supporting products and services tend to carry higher margins.

Specialty paper companies should consider

Profit Pool Assessment

0

2

4

6

8

10

12

14

16

0

5

10

15

20

25

30

35

Op

era

tin

g M

arg

in -

%

Re

ve

nu

e S

ha

re o

f In

du

stry

-%

Auto Industry Profit Pool Analysis (Bain - 1990's)

Revenue Share

Operating Margin

19

Specialty paper companies should consider related and supporting segments to grow their sales and profits:

• forward integrate into converting• supporting / related services• supporting / related products• bundled / integrated solutions• similar solution with different process or

technology• offer competing processes or solutions.

00

Used Car

Dealers

Auto Manuf Auto

Insurance

Service &

Repair

Aftermarket

Parts

Auto

Financing

Auto Rental New Car

Dealers

Warranty Gasoline

0

5

10

15

20

25

30

35

40

0

5

10

15

20

25

30

35

40

45

Personal

Computers

Other Components Periferals Services Software Micro Compressors

Op

era

tin

g M

arg

in -

%

Ind

ust

4ry

Re

ve

nu

e S

ha

re -

%

PC Industry Profit Pool Analysis (Bain - 1998)

Revenue Share

Operating Margin

Invest Strategically & Selectively

Another required

analysis considers the

attractiveness of markets

and the company’s

business position in

each.

“Business position” and

“attractiveness” can be

20

“attractiveness” can be

defined in different ways

to yield different results.

Depending on the

analytical result,

investments should then

be prioritized to ensure

the highest returns and

long term viability.

Develop a Real Competitive Advantage

Competitive advantages

can be based on cost or

product differentiation)

related dimensions

Unlike commodity papers,

successful specialty papers

are more likely to offer

product advantages

21

A narrow focus is most

appropriate for a small

specialty paper company

with limited resources

A broader focus creates

economies of scale which

potentially result in higher

profit margins.

New Products Spur Growth & Profits

Most specialty paper

markets and products

today operate in the

mature or declining

stage

This is evidenced by low

growth rates and a

2

2

growth rates and a

declining base of

competitors

Companies in these

businesses can only

grow by developing new

products, markets, or

broader / better

solutions (innovation).

Differentiate Away from the Competition“Blue Ocean” strategies

reduce the relevance

and impact of

competition

Declining markets are

often the result of

someone else's Blue

Ocean success

23

Successful Blue Ocean

initiatives have their

basis in a superior

understanding of

customer needs

Success requires a

totally different approach

and method of satisfying

customer needs.

*Excerpted from W. Chan Kim and Renee Mauborgne book

Consider All Paths to GrowthUnique tangible or

intangible capabilities

should provide the

foundation for a growth

initiative ….

But internal development

may not be the best growth

option for some companies

but it is usually the only

McKinsey Growth Pyramid

24

but it is usually the only

one considered

In mature or declining

markets, other approaches

are often the best option

Special relationships can

often provide the basis for

growth but this is rarely

pursued in our industry.

Specialty Paper

Companies –

25

Companies –

The Path to Success

New Broad-Based Approaches Are Needed

� Globalization / Localization

� Asia / New Economies

�Convenience Technologies

�Connected World

�Smart Technologies

�Increased Transparency

� Smarter Solutions using

High Performance

Materials and

Information Technologies

� Interactive Offerings

that Integrate Products &

26

�Increased Transparency

�Global Sustainability

�New Energy Solutions

�Aging Populations

�“Want it Now” Mentality

�Health & Well Being

that Integrate Products &

Services to Create Better

Solutions

� Relevant Values and

Methods that Match

Customer Objectives

� Empathetic Interactions

with Customers Based on

Deeper Understanding of

their Business

Focus on Issues Needing Solutions

�Counterfeit Products

�Food Waste

�Safety Concerns

�Aging Population

�Health Care Costs

�Litter (paper & plastic)

�Waste Collection / Processing

�Unique Product

Functionality

�More Sustainable

Products

�More Integrated Solutions

� “Cradle to Grave”

Approach

General Issues / Problems Potential Solutions

27

�Waste Collection / Processing

�Energy Sources / Concerns

�High Cost Supply Chains

�Fragmented Population Segments

�Distribution Channel Proliferation

�Fragmented Customer Needs

�Growing Information Needs

�Need for Increased Convenience

�Need for Lower Labor Costs

Approach

�Better Delivery Systems

�Different Access to Market

�More Individualized

Products & Services

�Complementary Products

& Services

�More Targeted Customer

Base

� Highly focused on a global niche segment

(grade / customer base / market / process)

� Forward integrated into converting / value

adding processes

Characteristics of Successful Specialty Paper Companies in Future

28

adding processes

� Value added service / solutions provider

� Unique value proposition

� Strong supply chain relationships / networks

� Commitment to ongoing development efforts

Food for Thought………

"It's not the strongest nor most

intelligent of the species that

survive; it is the one most adaptable

to change."

29

to change."

~ Charles Darwin

• Growth development consulting firm

focused on paper and packaging markets

• Based in Marietta, GA

• Contact:

Who is BDA?

30

• Contact:

Frank Perkowskifrank@bd-advisory.comwww.bd-advisory.com770-643-0981

Factors

Limiting Future

31

Limiting Future

Success

Traditional Thinking

Head in sand

3

2

mentalityFailure to Redefine your business in the face of change

“Head in Sand” Mentality

Failure to Redefine

3

3

your business in the face of change

Failure to Redefine the Business

Head in sand

3

4

mentality

New Products Spur Growth & Profits

Many specialty paper

grades compete as

mature or declining

products in the market.

This is shown by the

reduced number of

competitors in each

3

5

competitors in each

segment.

New industry solutions

are required to generate

new growth.

Processes and Supply Chains Trending in Different Directions

-1.0%

0.0%

1.0%

2.0%

3.0%

Av

era

ge

An

nu

al

Gro

wth

Ra

te b

y P

eri

od

Forecasted Growth Rates for Specialty Paper Converting Processes

3

6

-5.0%

-4.0%

-3.0%

-2.0%

Av

era

ge

An

nu

al

Gro

wth

Ra

te b

y P

eri

od

2006-2010 AAPC

2011-2015 AAPC

Supply / Value Chains Have Changed

� More global in nature� Increasingly fragmented� Widening gap between commodity and

specialty solutions� More / new channels to access

37

� More / new channels to access customers and deliver solutions

� E-commerce and electronics affecting every aspect of product and delivery

� Sustainability / green solutions taking hold

Structural Changes Affect Profit PotentialPorter’s Five Forces Model

Respond to

market structural

shifts in order to

increase profits.

Major shifts

include:

• Competitor exit / entry

38

• New product intro

• Customer changes

• New applications

• Supply / value chain changes.

Dynamics Vary by Grade Segment

1.0%

1.5%

2.0%

2.5%

Av

era

ge

5 Y

ea

r D

em

an

d G

row

th R

ate

%

Specialty Paper Demand Growth

By Major End Use Market and Period

3

9

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

Packaging Papers Printing Papers Technical Papers

Av

era

ge

5 Y

ea

r D

em

an

d G

row

th R

ate

%

2006-2010 AAPC

2011-2015 AAPC