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EXECUTIVE SUMMARY
Boise Cascade Corporation is a company in the paper and paper products industry."With more than two million acres of US timberlands, Boise Cascade distributes office products and produces more paper and building materials than you can shake a stick at" (Hoover's Online).Boise operates about 5 building-products mills, five paper mills, and nearly 0 wholesale building-material distribution centers.Its Boise Office Solutions subsidiary distributes office supplies through about 65 distribution centers and more than 100 retail outlets in Australia, Canada, New Zealand, and the US.Building and paper products include plywood, particleboard, newsprint, market pulp, containerboard, and uncoated free sheet paper.
The purpose of this strategy report is to summarize, in great detail, the major issues that have plagued the company in recent years, list alternative solutions for each issue (as well as pros and cons), and come up with the best possible alternative that may be used to solve each individual problem, keeping in mind other considerations that may play a role in the implementation of the proposed strategies.
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The appendices that follow the key issues section serve as a supplement to the issues covered, giving a little more detail on the company, its business practices and policies, financial and operating data, industrial and competitive outlook, as well as a SWOT analysis.
KEY ISSUES
Key Issue 1 Declining Financial Performance
Boise's earnings declined quite a bit in the year 00.Boise posted a loss, after preferred dividends, of 10 cents per diluted share for 00 (see appendix 1).By comparison, the company earned 57 cents per diluted share, before non-routine items, in 001.In addition, the firm's return on assets (ROA) was very low at 0.%, and its ROE was negative (see appendix 4 for a list of other important financial ratios).Boise's financial performance weakened in 00 because of lower product prices in its paper manufacturing business and reduced demand for higher-margin office supplies and furniture in the office products distribution business.While this performance was certainly disappointing, it was not unique.For all U.S. businesses, and particularly those in the manufacturing sector, the last five years have represented the most severe profit recession in more than 0 years.While the overall economy grew modestly last year, many sectors and aspects of the economy remained weak.
Alternative 1.1Boise should make an effort to reduce some of its production costs in order to offset some of the financial performance problems in the various divisions.
Pros
If Boise decides to take this route, the firm will possibly be in "good grace" with shareholders come next fiscal period due to an expected increase in dividends.
Factory machines will not get "overworked".
Fewer employees will be needed.
Variable costs will be reduced substantially.
Some fixed costs will be done away with as well.
Cons
Due to continuously deteriorating market conditions daily, Boise still may not turn a sizeable profit in order to get themselves out of the slums, and shareholders may still be angry with them at year-end.
Production processes in each of the various divisions will need to be restructured in order to compensate for the reduction in costs.
As a result of production process restructuring, sharp labor-management conflicts could arise.
Employees who were laid off because of this strategic move will file forunemployment benefits, costing the company more money.
Lowering production costs usually lowers the amount that is produced, leaving a gaping hole in sales.
Demand for office supplies may pick up once the economy starts to get better, and the company may miss out on valuable customers.
Alternative 1.Boise should increase production as well as raise the price of its paper in order to offset some of the differences in the other divisions.Boise obviously has a pretty high demand for its uncoated free sheet, containerboard, and newsprint paper products, yet they do not produce enough in order to make a sizeable profit.
Pros
If Boise were to increase production of paper, as well as slightly raise the price, the company may improve their financial performance in the paper sector for the current year.
Sales per ton for its major paper grades will increase.
Employees on the low end of the payroll structure will get some valuable overtime hours
Cons
The office supplies, furniture, and office products distribution businesses will continue to struggle because of the lack of attention to these areas.
Some employees may be dissatisfied with the overtime hours, as they may have familial obligations.
More employees may need to be hired, as plant capacity may increase to the extent that the current employee level may not be able to sustain it anymore.
Plant managers will be given more responsibility, which means that their pay will increase.
Alternative 1.Boise should adjust its product mix and sourcing in all areas of business.
Pros
If Boise carries out this strategy, the firm will improve the competitive position of all of its businesses.
Boise will also reduce its production costs in the process.
Best of all, the company will ensure consistent product quality across the board.
Boise will enhance service offerings to its customers.
Cons
Boise may not get the financial results that it wants right away, so shareholders will have to be very patient.
The economic environment will dictate just how much profitability will be achieved with this strategy.
Alternative Selection
I feel that Boise Cascade Corporation should select the third alternative as a solution to this issue because it would prove to be the least costly.
Implementation Considerations
If Boise were to implement this alternative, the firm would be able to capture the benefits of possible synergies between its paper manufacturing and office supplies businesses because some of its paper grades may also be sold in the office products sector.
Key Issue Unstable Energy and Fiber Costs
The Boise paper solutions segment is the company's primary energy user.Most of the segment's energy is supplied by the following sources
Natural Gas70%
Electricity8%
Residual fuel oil%
Fiber costs were also a problem.The price of wood fibers used to make paper fluctuated during 00.
Alternative .1Boise can take steps to focus its paper business on fewer facilities and grades.
Pros
In doing so, the company will release a lot of capital to be redeployed to other business sectors in order to balance out its costs evenly across all facets of the business.
Ongoing capital requirements will likely be reduced.
The firm may be able to achieve a stronger market position in its major paper grades.
Boise will be able to leverage the advantages of its competitive cost position.
In addition to potential annual money savings, there will be a lot of potential energy savings.
Cons
Sales of some paper grades may decline a little.
In an effort to still get a sizeable amount from Boise, suppliers may raise the price of its fiber material due to the fact that Boise will need less of it.
Alternative . Boise should consider using alternative energy sources (such as self-generated energy)
Pros
Variable costs will be reduced substantially.
The use of such alternative energy sources will improve the ecological situation in the region.
As the U.S., as well as the rest of the world, is experiencing shortage of oil and other energy resources, cost of energy will dramatically increase in the next future, so the use of a cheap alternative energy will pay off in a long run.
By using alternative energy sources, Boise will benefit in that they will build a strong relationship with the public.
Cons
Alternative energy resources are quite insufficient and to make them sufficient the company must invest significant amount of time and money.
By using alternative energy, Boise will have to dramatically change its strategy.
Alternative energy heavily depends on weather, thus some small changes in climate can severely undermine Boise's bottom line.
Alternative . Boise should concentrate more on developing value-added products and services, reducing its emphasis on commodity products.
Pros
By doing this, Boise can generate higher investment returns over time.
The firm can compete on business parameters other than cost alone.
Cons
Reducing its emphasis on the paper business will stifle its earnings in the paper segment.
The firm may become too one-dimensional.
Alternative Selection
Boise should choose alternative .1 as a solution to this problem
Implementation ConsiderationsDespite a weak paper market in 00, implementing this strategy is the best way to go in the current fiscal year.With the reduction in capital spending, the firm should generate positive cash flow during the period.
Key Issue Rising Pension and Operating Costs
Boise's pension costs are factored into its operating activities (Boise Cascade Annual Report, p.4).Most of Boise's employees are covered by noncontributory defined benefit pension plans, in which the firm uses the assets of to invest primarily in common stocks, fixed-income securities, and cash equivalents.The market performance of these investments affected the firm's recorded pension obligations, expense, and cash contributions for the year.For 00, Boise's total pension expense is expected to increase by $1 million or higher, a figure that could put the company further into debt (Boise Cascade 00 Annual Report, page 4).
Alternative .1Boise should restructure its employee pension plans to defined contribution plans.
Pros
If Boise switches the employee pension plan in this way, it will reduce some of the firm's costs in that the employees would have to "contribute" a specified amount into their own plans.
This plan would make it easier for accountants in that, with this type of plan, it would not be difficult to determine the amount that should be set aside for pensions, relative to the performance of the assets used to support the current pension funding, which are based on "critical accounting estimates" based on varying assumptions (Boise Cascade 00 Annual Report, page ).
Cons
Employees may become dissatisfied with the new plan (especially those on the low end of the salary level).
This plan may not reduce some of the debt that Boise has incurred as a result of operations.
Alternative .Boise should restructure its debt owed on plan assets used for the pension plans, in order to offset some of its operating costs.
Pros
In carrying out this action, Boise would reduce its minimum pension liability amount.
The firm would be able to increase its discount rate on the debt resulting in lower payments.
The adjustments would not really affect net income as much.
Cons
Shareholders' equity would decrease, but not by much.
Investors and creditors may begin to question the firm's operating activities, resulting in a lack of trust, and lack of funding for various future projects.
Alternative Selection
Boise should implement alternative .1 as a solution to this problem.
Implementation Considerations
This would be the best way to go for Boise because the firm would "hedge" out some of the risks involved in addition to reducing operating costs.To keep employees happy, however, the company may have to offer other incentives into the total retirement package.
Key Issue 4Environmental Issues
"Over the past several years, the amount of timber available for commercial harvest from public lands in the United States has declined significantly due to environmental litigation and changes in government policy." (Boise Cascade 00 Annual Report, pg. 1)As a result, Boise has closed a few of its plants due to the significant decline in federal timber offered for sale.In the coming years, further restraints on timber supply, both on public and private lands, could affect Boise's remaining facilities.As a result, Boise cannot accurately forecast its future log supply and costs.Additional market-related curtailments or closures of other product division facilities are possible.Boise is also having a lot of problems with environmentalists concerning harvesting old growth.Just recently, an environmental group started a campaign called "Boycott Boise", a call for all current Boise customers to discontinue their purchases of Boise paper products because of allegations that they are a "global forest destroyer." (Brown Environmental Action Network, Brown University, Spring 00)
Alternative 4.1 Boise should consider discontinuing its harvest of old growth.The company should not make any new commitments to enter into federal timber contracts that require harvests of timber from old growth forests.
Pros
Environmentalists will ease up on them.
Their corporate image may not get tarnished that much.
Due to the fact that only a very small percentage of Boise's wood supply actually comes from old growth forests, this move will not materially affect the company's available timber supply.
Cons
Though their image may not get tarnished a whole lot, Boise may still have to win back the confidence of some of its most important retail and industrial customers, and more importantly, some of its major fiber suppliers, as all of these groups may have some concern for the environment as well.
Boise may have to spend a lot of money in order to restore the image of their company as well as promote the brand name of their products.
Alternative 4.Boise should better promote its Sustainable Forestry Initiative Program.The company was granted this certification from the American Forest and Paper Association.The SFI program, as it is called, is a comprehensive system of principles, objectives, and performance measures that integrates the sustainable growth and harvesting of trees with protection of wildlife, plants, soil, and the quality of water.
Pros
If Boise earnestly promotes this program, they may be able to penetrate other markets, as consumer confidence will grow because people will feel that Boise has a genuine concern for the environment.
It would lead to gradual improvements in the firm's forest management practices.
More of Boise's products would be sold if interested buyers knew of their concern for a healthy environment.
Boise will gain the favor of regulators by showing that they are complying with the various federal, state, and local environmental laws in the areas in which they do business.If this happens, Boise will find it a little easier to open up facilities elsewhere.
Cons
Marketing costs money!!!
Boise will need an outside advising team to oversee the program in order to ensure that everything flows properlythe result, more out-of-pocket fees.
More managers (particularly marketing managers) may need to be hired as a result of this move.
Alternative Selection
Boise Cascade should go with alternative 4.1 because it may prove to be the most costly if ignored.I say this because, right now, the firm is already in deep water with these
environmental problems. Though Boise is not feeling the brunt of these accusations just yet, over time things may intensify. The company could lose out on a lot of potential sales in all of its divisions, more facilities may be closed, and some of the people in the corporation may be persecuted.The environment is a serious issue that cannot be taken lightly. Boise needs to act on this now by discontinuing the harvest of old growth.According to their annual report, it is only less than 1% of their wood supply.Why risk putting the company into trouble over this small amount?By taking this action, Boise saves itself a lot of time and money.
BIBLIOGRAPHY
Brown Environmental Action Network, Brown University, Spring 00.
http//www.brown.edu/Students/BEC/boise_issues.html
Harad, G. J."00 Annual Report", Boise Cascade Corporation,
Boise Idaho. 00.
Hoover's Online. www.hoovers.com
Market Guide Online. www.marketguide.com
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