The past decade has been a punishing one for shareholders of pulp-and-paper companies, and the current low level of returns is expected to continue. Notwithstanding a series of acquisitions in early 2000, the industry remains fairly fragmented, and legal constraints generally limit concentration. Even in segments that are fairly concentrated, independents are numerous enough to make competition fierce. Meanwhile, international players apply pressure wherever regional price umbrellas appear. Thus the pulp-and-paper industry, despite a certain amount of consolidation, has created less long-term value than have other asset-intensive basic-materials industries (Exhibit 1).

As if the structure of the industry wasn’t difficult enough, almost no pulp-and-paper companies have managed to develop significant intangible or privileged assets (such as proprietary technology or patents) or superior operational practices. Both of these failures exert intense commoditization pressures. Management’s propensity to spend capital in good times and to cut back in bad amplifies the industry’s cyclical nature and compounds all of these problems.

Depending on where companies stand between the trough and the peak of the business cycle, their valuations range from one to two times book value. No surprise, then, that the industry is losing the war for talent, and doubly so in the face of all the exciting new opportunities—not least, the stock options awarded to executives—emerging in electronic commerce.

Pulp-and-paper companies fall into three broad categories. Despite the gloom, the companies belonging to each have a winning, or at least a remedial, strategy (Exhibit 2).

"Underperforming" companies ought to be treated as corporate raiders would treat them in the first 90 days after a takeover. In other words, parts of these companies should be liquidated or placed elsewhere if that would enhance their value, and their executives should be retained, reassigned, or dismissed on the basis of competencies and track records. In addition, financial leverage should be used to extract cash from mature assets. By the end of the process, profitable businesses will have a new focus. Most of these steps were taken during the 1997-98 turnaround at Canada’s MacMillan Bloedel.

"In-the-pack" companies need to focus on the three pillars of productivity: operating costs, revenue, and capital investment. Research suggests that taking a rigorous approach to capital productivity and establishing cycle management, risk management, and customer productivity programs can help the industry’s commodity businesses achieve operating margins that are 5 to 10 percent higher than those of their average competitors. Of the three strategies, this one is the most demanding.

"Shaping" companies inspire or force other players to emulate their strategies or tactics. Their superior productivity allows them to develop intangible assets and skills. There are few such companies in the pulp-and-paper industry, and they commonly adopt niche strategies. Kimberly-Clark has perhaps been its most important shaper during the past 15 years. By shedding unproductive assets, focusing on profitable segments, and leveraging brands, the company moved its market-to-book ratio up to 7:1, the top of the shaping range. Few people remember that Kimberly-Clark too was once in the pack.

By definition, most companies find themselves in the pack. They must begin the hard work of improving their operating and capital productivity.

In view of the history of most pulp-and-paper companies, making this happen may require an energetic board and chief executive officer to lead a cultural revolution.