The fourth option Is one that focuses on diminishing the environmental impact of Amp’s operations. While the fourth option has merit in alleviating environmental concerns, it does not have a costive financial impact on Amp’s operations. AMP created four distinct products that serve the specific needs of four consumer segments. These segments include offset printing, copy paper, taprooms, and recycled paper. The respective segments all offer different contribution margins to Amp’s operations and vary greatly in their respective growth in demand over the next six years.
The key operational decision is one that affords AMP the flexibility to use additional capacity to meet the growing demands of the most profitable sub-segments of the uncoated fine paper market. Conclusion AMP should choose the option outlined by the group general manager that affords the most flexibility to meet the growing demand in the uncoated fine paper market. That being considered, AMP must also meet the predetermined returns required by its parent corporation, Amoco.
These targets are required for the release of capital to AMP, and while Amoco has set minimum return thresholds, AMP should strive to create the largest return on investment to its parent company. Option 1, described in the Appendix, satisfies this obligation to Amoco and allows AMP the most flexibility In using Increased capacity. This option also allows AMP to return considerable cash flow over the five year period without overextending Its operations beyond the market demand.
Identification Key operations generalness They key operations challenge for AMP is the need to adapt its operations strategy in order to expand its capacity and meet the growing demand in the uncoated fine paper market. AMP is currently at its maximum throughput capacity and must invest considerable capital to expand its operations. The company is contemplating several different courses, each with valid business context, and must ecocide which option allows AMP to best meet the growing demand while maintaining and developing further competitive advantages.
Operations Strategy Amp’s operations strategy focuses on superior customer service and quality compared to its competitors in the fine paper industry. AMP made the decision to enter the uncoated fine paper market in 1987 and used its experience in paperboard manufacturing to Jump start this expansion. As the success of Amp’s fine paper production ramped up, the company deemphasized its dependence on the paperboard market. This business decision influenced Amp’s operational decision o invest in efficient technology that allowed it better quality and cost advantaged compared to its competitors.
Furthermore, AMP opted to vertically integrate its operations to include pulping for non-recycled paper and the collection of used office paper in order to gather raw materials to compete in the recycled paper market. Customer Needs AMP competes to satisfy its customers’ needs of quality and environmental performance. The company invested considerable resources in state of the art equipment that provides superior fine paper via four distinct offerings: Printing, Darting, CopyRight, and Right.
Printing was designed to satisfy the offset printing needs of businesses, Darting was designed to suit form creation, CopyRight was created for everyday copying, and Right was a recycled office paper offering targeted at the environmentally conscious customer. Each of these products met the specific quality standards of its target customers. AMP utilized superior technology that created a higher quality paper than any of its competitors. Amp’s investment in more efficient technology also paid off in satisfying the environmental considerations of its customers.
The processes and equipment that AMP used rated fewer organogenesis than the old machines and processes of Paper Company of Australia (PICA), Amp’s chief competitor. Furthermore, Amp’s investment in Right scored the endorsement of the World Wildlife Fund for its respect for and positive impact on the environment. This coupled with Amp’s initiative of the “AMP Office Paper Chase” (Upton, 1993, p. 13) placed the company well ahead of its competition in terms of satisfying the environmental performance needs of its customers.
Business context Tort Immediate Decision The market for uncoated fine paper was projected to grow at a rate of 6. 5% annually for the next ten years. The market for copier paper alone, a sub-segment of uncoated fine paper, was projected to grow at a rate of 10% per year for the next decade. The CEO of AMP stated “If we sit still, we’ll get hurt sometime before the year 2000. Whoever takes the next big step will have it made in Australia… If PICA decides to expand… What will their net increase be” (Upton, 1993, up. 15-16)?
In addition to these financial considerations, AMP and the Australian paper market at large continue to face mounting pressure from environmental groups that are opposed to any further expansion of the paper industry. Environmentalists have urged paper manufacturers to “think globally, act locally’ (Upton, 1993, p. 16) and to “reduce first, reuse second, and recycle third” (p. 16). In order to either satisfy the requests of the environmentalists or to contradict their wishes, AMP must make an operational decision sooner rather than later to avoid these mounting pressures.
Analysis and Evaluation of Critical Decision Factors Competitive Analysis AMP has quickly established itself as the growing force in the domestic uncoated fine paper market in Australia. Its chief competitor is Paper Company of Australia PICA). PICA dominated the Australian uncoated and coated fine paper market for many years with virtually no domestic competition. Pica’s processes and equipment are out-of-date and still rely on machinery that was manufactured in the sass.
PICA also forced its customers to purchase its products through merchants, while AMP developed a direct sales approach with customers. The secondary source of competition exists among the imported paper products in the Australian market. Low tariffs allowed for international competitors to enter the market and compete with domestic paper supply. Until AMP opted to enter the uncoated fine paper market, each domestic paper manufacturer in Australia kept to its own markets.
Five Forces The rivalry among competing sellers in the fine paper market in Australia is fairly strong because the cost for consumers to switch products is low, the products are weakly differentiated, the competitors are roughly equal in size, many import competitors exist, and there are high exit barriers due to the high fixed costs and capital investments required to enter the fine paper market. The advantages that AMP and PICA benefit from include the rising demand for fine paper in the market ND domestic competition is limited to these two competitors. The threat of potential new competitors is fairly weak in the fine paper market.
This is because high barriers to entry exist in the fine paper market, including high economies of scale, experienced-based cost advantages for existing firms, high capital requirements to enter the market, and restrictive environmental policies on paper contest new entrants and the existing members generally stay in their own lanes. The potential risks associated with new entrants to the market include the rapidly growing demand for fine paper and that existing industry members could make operational changes to concentrate on the growing recycled paper segment of the fine paper market.
The threat from other firms offering substitute products in the Australian fine paper market is very low. Virtually no substitutes exist for paper, and at this time, the business and personal computer market is Just beginning to take shape. Supplier bargaining power in the Australian fine paper market is also very weak. This is because both AMP and PICA have vertically integrated their operations. AMP controls its own foresting, pulp mills, and paper manufacturing plants. While he foresting areas are limited, AMP has utilized a replanting strategy which creates more trees than it presently uses in its operations.
Therefore, there is no need to use outside suppliers for its operations. The bargaining power of buyers is only a moderate risk to AMP and the Australian paper market. Buyers have limited power because the cost of switching products is low and the products are generally undifferentiated. However, the buyers are small and numerous relative to the sellers in the market, buyer’s information regarding sellers is limited in quantity and quality, ND buyers are generally not price sensitive in this market because paper purchases are a small part of the total purchases and cost structure of most organizations.
STOW Analysts The STOW Analysis for AMP reveals the following: Strengths ; Highest quality domestic paper products ; Most efficient domestic paper-making technology with customers ; Direct relationships ; Focused products on four distinct customer segments ; Satisfy customer needs of quality and environmental performance ; Part of a larger company (Amoco) with ability to invest capital in growth ; One of only two domestic fine paper manufacturers in country strength in fine paper processes Right paper product Weaknesses ; Expertise in paperboard has translated to ; Endorsement of World Wildlife Fund for ; Relatively new to the fine paper market ; Brands/products not as well-known as heritage market brands Insufficient capacity to meet growing demand ; High expansion costs/capital required ; High fixed costs Opportunities ; AMP Office Paper Chase initiative to gather more recycled paper ; Ability to expand Ana capture greater snare AT growing Tine paper market ; Recycled paper market growing with support of environmentalists Non-chlorine bleaching process technologies available ; PICA is in the corsairs of environmental groups Threats ; Mounting pressure against expansion from environmental groups Possible legislation/litigation against manufacturing processes ; PICA may invest in new technology/opt to expand its operations ; Import competitors may create newer, higher quality, and/or low cost products to gain market share ; New competitors, domestic or international, may enter the market ; Disease that affects trees/replanting efforts Financial Analysis AMP had no presence in the uncoated fine paper market in 1986. I Long-term Uncoated Fine Paper Market in Australia (000 tones) 11986 1 I Category I Forecast I Demand I I Continuous Forms I PICA I Make Share I Imports I I Category I Demand I I Offset Printing 144 178 16 17. 7% I Copier 10 1150 166 144. 0% 1302 195 I I Recycled 131. 5% I 130 123 176. 7% I Total Amp’s contribution margin per product is driven first by its recycled paper, then its copier paper, followed by offset printing paper and continuous forms.
Copier paper comprises the largest percentage of Amp’s manufacturing, followed by offset printing, continuous forms, and recycled paper, respectively. Contribution Margin for AMP in I 11989 I Tones I Produced 117,000 | 28,000 125,000 | 7,000 I Contribution I per tone | $460 1260 1490 1610 I Total Contribution I Share 7820,oho 124. 7% 123. 0% 138. 7% 113. 5% I I Copier I I Total The group general manager of AMP outlined four potential capital projects in the case study. Each of these options and their respective costs relative to the capacity they provide are outlined in the table below. Option 1 provides the best cost per tone AAA t 01 IANAL capacity galena AMP. Upton 3 proposes no allotment capacity Tort I Evaluation of capital expenditures and options I Lipton 1 I I Machine 3 at Marble expanded from 70,000 to 100,000 tones for $MOM I Capacity may be used for expansion of any fine paper product production (installation time) 30,000 additional capacity I I Unknown: Time from investment to I Additional capacity Capital required 1,166. 67 I Price per tone of I Lipton 2 I Fairfield expansion from 7,000 tones to 1 5,000 tones for $MOM I Capacity may be used for expansion of recycled paper 8,000 2,250. 00 I Lipton 3 Investment in technology to reduce organogenesis has no impact on Amp’s capacity or throughput respectively, with no return on investment
I Requires $MOM and $MM I | $MOM investment would reduce throughput by 5% I Lipton 4 I I Investment to purchase/ install new paper machine with 150,000 tones capacity for $MOM I I Capacity may be used for expansion of any fine paper product I lunation: cost of new pulp mill associated with this project, return garnered from selling excess pulp capacity, I Demand for coated paper market 1 50,000 I Capital required 2,333. 33 Price per tone AT allotment capacity Alternative Recommendations Option 3 from the financial analysis has been eliminated, as it offers no additional capacity. Because additional capacity represents the largest opportunity for AMP, only capital projects that yield greater capacity should be considered at this time. The remaining three options and a combination option are presented in the table in the Appendix. Recommendation and Plan of Action It is recommended that AMP utilizes Option 1 immediately.
Option 1 is the only option that provides a near-immediate increase in capacity while satisfying Amos’s requirement (Amp’s parent company) off 20% rate of return. The first option provides over $32 million in positive net present value and a 36. 1% internal rate of return over the course of the next five years. Option 1 also yields the most flexibility in satisfying the growing demand in the uncoated fine paper market. Option 2 does turn a positive net present value of $1. 8 million for AMP, but only provides a 10. 67% internal rate of return. Because the project only yields an additional 8,000 tones of capacity, it cannot satisfy the rate of return requirements of Amoco.
The third option requires the largest outflow of capital and produces the highest level of capacity. However, market demand is insufficient to Justify this capital expense at this time. This is further supported by the negative net present value and negative rate of return calculations. Option 4 combines the first two options, in which case the combined capacity and capital outlay collectively satisfies the required return for Amoco. However, the net present value and the internal rate of return are lower with the combined option than the first option. Competitive Advantage If AMP acts on the recommendation to move forward with Option 1, it will gain the competitive advantage of capacity.
However, even with the added capacity granted y Option 1, AMP can only expect to reach parity with the capacity of PICA. This is supported by Pica’s current output of 108,000 tones of uncoated fine paper and Amp’s current output of 77,000 tones. With neither domestic competitor in position to take full advantage of the market’s growing demand for uncoated fine paper, which will reach 305,000 tones by 1995, import competitors may gain the largest competitive advantage. ‘s principle competitive advantage In ten market Is ten quality AT Its products Because AMP has invested considerable capital into newer technology than PICA, it is n a better position to continue this domestic lead over its rival.
Similarly, Amp’s investment in more efficient technology has placed it in a better position to deal with the environmental concerns associated with paper manufacturing. Conversely, Pica’s outdated technology and processes create more pollution and have caused it to become the target of environmentalist groups. Impact to Business, Customers, and Competitors If AMP is able to enact Option 1, it stands to gain over $15 million in additional cash flow per year, in addition to $32 million in positive net present value over the course of five years, and a 36. % return on its investment. This increase in capacity will also allow AMP to match the output of the market leader, PICA.
The customers of the Australian paper market stand to benefit from Amp’s additional capacity in terms of quality, availability, and environmental performance. AMP uses more efficient technology to create higher quality products. The increase in capacity from AMP will allow these products to be available to more consumers. Amp’s emphasis on recycled paper manufacturing will also help to satisfy the growing demand in this segment and assuage environmental concerns about increased domestic paper manufacturing PICA will be impacted, at least short term, by the increased capacity created by AMP through the utilization of Option 1. This increased capacity will allow AMP to continue its momentum in gaining market share. However, the uncoated fine paper market is growing quickly.
By 1995, even with the utilization of Option 1 by AMP, neither PICA nor AMP will have sufficient capacity to meet the market demand for uncoated fine paper. Therefore, import competition will also have a strong advantage in gaining market share. The only way to prevent the market demand increases from benefiting international competitors is for AMP, PICA, or another domestic competitor to considerably expand capacity and/or enter the uncoated fine paper market. AMP must act quickly to continue its growth in the uncoated fine paper market. The market is expanding rapidly, and with both AMP and PICA operating at full capacity the market is ripe for the company that can create it. Option 1 is the most logical operational choice for AMP that also makes good business sense.
Option 1 quickly expands its current capacity by 30,000 tones per year in the most versatile ill that can use the capacity to meet any demand that arises in the market. Adding any additional options presented brings down NAP and AIR for the company. However, AMP should closely monitor the uncoated fine paper market for the next several years Ana reevaluate ten expected level AT mean IT . ten mean accelerates at a faster-than-expected pace, or once demand has reached a level in which it becomes possible for AMP to Justify the significant capital investment of a new pulp mill and large capacity machine, it should consider expanding its capacity to take advantage of this growing demand. References Upton, David. (December 13, 1993). Australian Paper Manufacturers (A). Harvard Business School. 9-691-041.
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