Question

A knotty problem

Nice Wood Products is a small but successful Pacific Coast firm that produces standard types and grades of lumber for the domestic construction industry. This includes 2x4s and 2x6s used in framing as well as plywood and particle board. With the financial setbacks caused by the sub-prime mortgage crisis, the construction industry has experienced a significant decline in housing starts. Fewer houses are being built and it is likely that for the immediate future, there is going to be a slowdown in the construction industry.

Nice Wood could ride out the storm. The slowdown is temporary and will likely last only a year or two, after which construction will probably revive. The company has an established client base and strong relationships throughout the industry, which would allow it to ramp up quickly once housing starts began to rise again. On the other hand, in the short term, this would mean that the company would experience some contraction, including some layoffs. The company is a close-knit operation and senior management values the skills and loyalty of its workers. It does not want to alienate that base through measures that would demoralize employees or undermine their commitment to the

Eastern promise

One strategy that the company had already been contemplating was to diversify its markets as a way of buffering itself against cyclical downturns in its domestic market. Specifically, a few years ago, irritated with the intransigence of its free trade partners regarding softwood lumber products, it had started looking at East Asia in general and China in particular, as a new target market.

At the time, it had sent over a scouting team made up of several senior managers to get a sense of the market and what it would take to penetrate it successfully. The scouting team reported that China was in the midst of an unprecedented economic expansion the likes of which had probably never been seen in history. The scale and pace of construction was breathtaking. However, there were two significant impediments that Nice Wood had to face. On the one hand, Chinese building standards were very different. Lumber grades and dimensions were unique to China and not compatible with those in the home market.

On the other hand, Chinese prices were extremely low by developed world standards. For lumber to compete in China, it had to be sold at prices that were far lower than those in the home market. At the time, these two objections seemed decisive and Nice Wood shelved any thoughts of expansion into the Chinese market. Now with a slowdown looming, the VP of business development dusted off the old report.

Technology to the rescue

Since the original scouting expedition, a few things had changed in the lumber industry. The introduction of new technologies had automated many of the processes associated with picking, cutting and curing wood. Equipment was now available to cut wood to a variety of standards and prepare it in a variety of ways for shipment and use. The

other part of the equation was that freshly harvested wood needed to dry out before cutting so that it would not bend or warp during the drying process. New types of kilns were available to accelerate this process. Finally there was the challenge of shipping. If the lumber could be dried, cut, bundled and then loaded on vessels automatically, this might reduce costs. That would make the lumber competitive in China. Certainly lading technology at the ports had evolved significantly with the advent of containerization. The real problem was the timing of the various steps in the process. The wood first had to sit around drying. Then it was cut. Then it was loaded into containers for chipping. Then it sat in the containers during transport. Somehow, the wood spent too much time “sitting around.” Was there a way of redesigning this process?

There was another challenge, however. The VP of business development recognized that Nice Wood had a relatively short window of opportunity to develop the Chinese opportunity. The mortgage crisis would not last forever and once it had passed, the other executives in the company would probably turn their attention back to domestic markets. Whatever was to be done had to be done quickly. The VP wondered what options were available to enable rapid penetration of the Chinese market.

Finally, there was the question of how to pay for all this. New technology cost money, as did retraining workers in its use. Given the current slowdown, securing additional funding, even from familiar and reliable bankers, could prove to be a problem.

The VP of business development was convinced that the adoption of new technology in new ways could create an opportunity in China. Certainly the idea of riding out the current slowdown by developing new outlets had considerable appeal. Over the longer term, opening up China would guarantee Nice Wood customers with virtually unlimited demand for its products and without the irritations of local protectionism.

The first step was to put together a business case for having another look at the Chinese market. The case would depend on two critical factors: preparing wood to Chinese standards and cutting costs to make the wood competitive in Chinese markets.

The VP has turned to you for advice in developing his case. Specifically, he wants you to set out the kinds of questions that the case should address, as well as some ideas about the methodology to be used in developing answers to those questions.

Case Study Discussion Questions

1. What strategies are available to Nice Wood to accelerate the process?

2. How can the venture be financed?

3. What are the risks involved in the venture and how can they be managed?

Answer 1

1. The firm should buid a business/project plan focussed entirely on entering the expanding Chinese market based on more advance lumbar tachnologies of the developed nation. This more effective and lean technology will be new and attractive for Chinese markets as their cutting edge technology would promise lesser time for constuction. Their business plan will channelising their existing workforce to China to focus entirely on building this proposed market. This will harness their existing resources backed by advantageous techologies of the home to set foot in the Chinese constcurtion industry.

--Acquire latest techical expertise for the wood industry

--Deploy existing loyal employees to China for showcasing their better products at competitive rates.

--Effective utilisation of all resources to penetrate Chinese markets till home markets come out from the recession of mortgage crisis.

This business plan will be endorsed by all business heads since the firm will expand overseas to increase profitability from cheaper Chinese construction market.

2. The most effective way of financing this venture would be to join hands with a Chinese construction company for financing this venture:-

Nice Wood would be the Technological Partner and Chinese arm would be the Financing Partner. Shipping the chisled lumbar customed to the project demand to China will be the role of Nice Wood and marketing it in the Chinese souk will be the responsibility of the Chinese partner. This JV will solve Nice Wood's problem of raising funds from an already dried up home market and the Chinese firm would get expand its base in China with latest technologies for construction from the West. This Joint Venture would be in the best interest of both the partners.

3.Following are the risks involved:-

(a) Market Risk:- The expanding Chinese market find the product costly and not much different from their domestic market. Best way to alleviate this risk is mass level production of cutting edge lumbar so the cost of production is low and thus more effective cost of lumbar can be quoted in the Chines market. Also branding the product alongwith the Chinese partner's name would solve the issue of non home market lable.

(b) JV Failing:- The most risky part of this whole business plan is the faling of proposed JV. The Chinese arm not adhering to the terms of the JV can be disastorous for the whole project. This risk can be alleviated by doing a JV with big corporation with establised brand name in the Chinese Market. Setting out proper legal aspects of the whole partnership so that strong legal implications be inflicted if any of the partners deviate..

(c)Business Risk: The other divisional heads of Nice Wood may not agree.to the venture. This risk can be alleviated by presenting a strong profitable business JV to al the heads and appraising all workforce about the same to keep tem all held together.

(d) Financial Risk: The entire project demands good investment in Techonology, Shipping and Marketing in Chinese markets. The Chinese partnership would ensure funds are never short. Even venture capitalists be presented this project for financing back up. Tie up with a good shipping firm in home market would ensure shipping of lumbar is always smooth. JV with giant Chinese construction company would ensure that their brand image is harnessed effeciently for marketing this new lumbar in the expanding construction industry in China.