By Brian Perkins and Dr. Robert Smith

 

Aspect of Globalization that caused Firm to Change
Reason for Change Cited by % of Respondents
Loss of domestic manufacturing 41%
Increase in U.S. imports 36%
Foreign competition 28%
Slow growth of domestic markets 22%
Other 16%
Better technology 12%

Globalization has been occurring for centuries. From its earliest beginning to present day, the desire to trade goods and services has been the driving force behind internationalization. The pace of globalization increased as boat building and navigation technology allowed early explorers to travel the world and exploit people and resources. The rate of global integration has also increased rapidly in the past century, and especially in the last 50 years with the advent of ever more sophisticated technology.

What exactly is globalization? According to Wikipedia, globalization is the increasing global connectivity, integration and interdependence in the economic, social, technological, cultural, political and ecological spheres. North America, Europe and Australia are more internationalized than South America, Africa and Asia.

The trade of forest products has increased steadily if not dramatically at times since data was first collected by the Food & Agriculture Organization of the United Nations in 1961. The data indicate increasing volumes of sawn wood, paper and wood-based panels are imported and exported every year. By 2005, world forest products trade was valued at close to US $200 billion.

In the United States, the volume of forest products imports and exports were roughly equal in 1990, according to data from the USDA Foreign Agricultural Service. However, in 2006, the U.S. forest products import volume was approximately four times greater than the forest products export volume. This data confirms what companies have been experiencing in the business world - ever increasing competition from imported forest products. This import surge coincides with a strengthening dollar during this time period. One would expect an increase in exports when the dollar is weakening relative to other currencies.

Globalization is not new to large forest products companies that have been doing business and investing overseas for decades. According to statistics from the Internal Revenue Service, 8% of paper-manufacturing companies' net income was derived from foreign income based on the 1993-2004 period. Wood product manufacturers and manufacturers in general averaged 1% and 5%, respectively. Clearly, wood product manufacturers have plenty of scope for expansion of overseas business. For relatively smaller forest products companies such as hardwood lumber companies, globalization has seemingly come out of nowhere during the past 10 years with the loss of domestic manufacturing, and increased competition from imports.

Response Factors

HL

HS

SL

SS

VIFPC

All

Attitudes of decision makers

4.4

4.5

4.3

4.8

4.5

4.5

Knowledge of foreign markets

4.7

4.3

4.4

4.3

4.5

4.4

Increased cost controls

4.4

4.5

4.0

4.4

4.5

4.3

Export market development

4.7

4.2

4.3

4.2

4.3

4.3

Changes in production processes

4.1

4.3

4.1

4.1

4.3

4.2

Changes in sales structure

4.6

4.3

4.0

4.0

4.0

4.1

Changes in product features

4.1

4.0

4.3

4.4

4.0

4.1

Increased domestic investment

3.8

3.9

3.9

3.8

3.9

3.8

Alternative transportation methods

3.8

3.5

3.6

4.0

4.1

3.8

Increased foreign investment

3.5

3.7

3.3

3.7

3.4

3.5

Average

4.2

4.1

4.0

4.2

4.1

 

(Table 2) Importance of Response Factors: Companies were asked to rate the relative importance of 10 factors in their response to globalization. The factors were developed from previous research and intuitive, logical reasoning. This table shows the importance rating broken down by industry segments: hardwood lumber (HL), hardwood lumber & secondary (HS), softwood lumber (SL), softwood lumber and secondary (SS), plus vertically integrated forest products companies (VIFPC) and the overall importance rating average.

Globalization Survey

It is within this context that a brief study on globalization was initiated at the Center for Forest Products Marketing & Management in the Department of Wood Science and Forest Products at Virginia Tech. The study consisted of a seven-question Internet survey, which was sent to the e-mail distribution list for Center Focus, a publication of Virginia Tech’s Forest Products department.

This email list consists of 700 forest products industry personnel who have been active with the center over the years, taken one of the center's short courses or otherwise communicated with the center. The questionnaire consisted of two demographics questions, three multiple-choice questions about globalization and two open ended questions about companies' responses to globalization.The Internet survey was open for 2-1/2 weeks with one e-mail reminder sent during the second week. A total of 76 responses were received for a response rate of 11%.

Nearly every respondent, 92%, indicated that their company had been affected by globalization. Not surprising, a broad spectrum of the forest products industry participated in the survey. Participants ranging from hardwood companies to softwood companies to integrated companies along with others responded to the survey. Hardwood lumber and hardwood secondary manufacturing companies accounted for 46% of respondents. The majority (56%) of firms had sales of greater than $20 million.

When asked about the aspect of globalization that caused their company to change, respondents cited loss of domestic manufacturing, increase in U.S. imports and foreign competition most frequently. Approximately 60% of respondents cited multiple globalization effects that created change in their firms.

Companies were asked to rate the relative importance of 10 factors in their response to globalization. The factors (Table 2) were developed from previous research and intuitive, logical reasoning. Table 2 shows the importance rating broken down by industry segments: hardwood lumber (HL), hardwood lumber & secondary (HS), softwood lumber (SL), softwood lumber and secondary (SS), plus vertically integrated forest products companies (VIFPC) and the overall importance rating average.

The attitudes of decision makers and their knowledge of foreign markets were rated most important followed by increased cost controls and export market development. Increased foreign investment and alternative transportation methods were rated the least important of all factors. There was no statistically significant difference among the groups.

Depending on the segment a company is in, some factors will be more important than others and there may be others that are not on our list. For example, hardwood lumber companies rated knowledge of foreign markets, export market development and changes in sales structure the three most important factors in their response to globalization.  Hardwood lumber and secondary manufacturing companies rated increased cost controls, attitude of decision makers and changes in sales structure/production processes the most important factors. For hardwood companies who are changing or planning to change their operations in response to globalization, the top seven factors, which were rated from somewhat to very important, should be taken into consideration by management.

Overall, respondents indicated in the open-ended questions that their company had reduced lead times, changed products, increased travel, reduced costs and explored export markets to address globalization. The results of these efforts ranged from positive (30%) and neutral (31%) to not yet known (21%) and not applicable (18%). Companies are making changes in response to the challenges of globalization and the majority of them (61%) report positive or neutral results. 

Hardwood lumber companies reported a number of strategic reactions in response to globalization with mixed results. The most common strategy seemed to be export marketing: exploring foreign markets, developing contacts, promoting U.S. hardwood lumber and finding sales representatives. Each one of the generic strategies was represented in the company responses: focus, differentiation and low-cost.  The results of these new tactics were mixed but the majority of respondents reporting an export marketing strategy generally indicated positive results in the form of new customers or increased exports. 

A number of companies reported what their companies had done in response to globalization but did not answer the follow up question of what were the results. This seems to point to two distinct possibilities: either the results were negative or unknown. Respondents not reporting negative results in a survey is culturally understandable, but not knowing if a strategy is working or not indicates a lack of business performance measurement. The goal of business performance measurement (such as the ever popular Balanced Scorecard) is to find out how well your strategy is working. Future research into strategy and performance measurement in the hardwood lumber industry is planned.

For a company who has yet to change in response to globalization, the results of this research give a glimpse of what its peers are doing. Companies must continue to innovate and add more value than competitors because economic globalization will only continue.

Editor’s Note: Brian Perkins is a Graduate Research Assistant and Dr. Robert Smith is a professor of Forest Products Marketing & Management in the Department of Wood Science and Forest Products at Virginia Tech, Blacksburg, VA.

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