Mon, 21 Jul 2003

Comprehensive marketing vital for survival

Mahendra Gautama Contributor Jakarta

The paper and pulp industry is one of the oldest in Indonesia. Its history began when the Dutch company, NV Papier Fabriek Nijmegen, set up NV Papier Padalarang in 1923 in Padalarang, West Java. After the country's independence, the company was nationalized and still exists, under the name PN Kertas Padalarang.

In 1984, a major company, Indah Kiat, was established in Riau as a pioneer in the integrated manufacturing of pulp and paper, with a huge capacity of 100,000 tons per year. The establishment of the company was triggered by regulations issued by the ministry of industry and trade in 1980 aimed at making Indonesia one of the world's largest pulp and paper producers.

Forum Asia Pulp and Paper issued a report in 2001 indicating that Indonesia had 81 pulp and paper mills, including seven integrated manufacturing mills. The total capacity was reported as 3,920,000 tons annually. Sumatra enjoyed the largest portion of the business with 86 percent of the companies running on the island, while Kalimantan had the remaining 14 percent.

With such a huge production capacity, the current picture for the country's pulp and paper industry is not entirely bright. Profits are extremely low due to several factors, including a decline in market demand, overcapacity of production and a price war among most manufacturers.

One of the world's most reputable consultants, McKinsey, said in its report Pricing Commodities that several factors are behind these problems.

The first factor is the mind-set of most marketers in the pulp and paper industry. They wrongly believe that there is no possibility of selling their products at premium prices based on quality and proper branding. They seem to think that their products are in the category of "me-too" products, or much too similar to their competitors' products to enable them to make any differentiation, which should naturally lead to a better pricing strategy.

Second, the business players in this sector have for years stuck to the credo "Volume is what counts". Unfortunately this has led them to chase after tonnage or volume without a proper assessment of related market demand.

Factor number three is their firm belief that competitors are also after production capacity of the highest volume.

Last, again incorrectly, they believe that the major concern of customers is only the price.

All these misconceptions have made them "numb" and rendered them incapable of cherry-picking customers that they can serve best for a higher percentage of profit.

Due to the above factors, which are related to the mind-set of marketers, it is not surprising that these companies are constantly engaged in a price war. Another result is that other important aspects of marketing are completely forgotten, including elements of service such as lead time and so forth.

Quite recently, however, most players in this industry have begun to realize their past mistakes and tremendous improvements have been made, while more are on the way.

This was confirmed by a survey conducted by Accenture early this year, with 250 executives and marketers from the industry as respondents. The report, titled A study of the forest product industry, drew some interesting conclusions.

Fully integrated marketing efforts with fine-tuned targeting, or segmentation, was mentioned as being the most vital factor for a company's returns. Strategic price management was, of course, no less important. Close in importance was aligning the organizational structure for delivering both products and services.

The report also said that most executives now realize that marketing consists of more than selling and its related skills. In today's highly competitive environment even commodities require marketing that comprises branding and brand-management for long-term survival.

In the area of segmentation, marketers now realize that instead of dividing customers into big and small ones, they should refer to them as those who value quality products and services versus the rest who only care about logistics or just regard the products as "unidentifiable" commodities. In this way companies can easily concentrate on those customers who contribute the most, meaning those who provide for more of a profit.

Capacity management is also deemed necessary to reduce any excessive production and oversupply which automatically lead to a decline in prices. Hence, proper estimates and forecasts of current and future demand have to be made.

Similar to communications for fast-moving consumer goods, they also are aware that the industry has to adopt distinctive branding and constant-plus creative advertising. The consistently high quality of products and services as promised in advertising is the order of the day.

Meanwhile, there are three prerequisites prior to this kind of fully integrated marketing as mentioned by Johan Ahlberg, Hanne De Mora and William E. Hoover in their report titled Beyond volume in commodity business.

The first step is to adopt the "true order of economics", basically meaning to identify elements that turn into "bottleneck costs" or other hampering factors in the entire manufacturing and delivery process. Second, the marketing department should meticulously and regularly prepare sales reports and estimates along with related developments, such as competitors' moves, trends, etc., so that correct decisions for prices and internal logistics can be made. Step number three is copying some of the benchmarks used by other noncommodity businesses, like those used for marketing by some leading channel management companies.

In the less glamorous world of commodity products, where marketing used to be interpreted as merely selling using antiquated tactics, branding and its main weapon, advertising, were regarded as far-fetched. However, with the recent implementation of most of these comprehensive and up-to-date marketing techniques by the country's marketers in the pulp and paper industry, the road to survival is now less bumpy.