Marketing Strategy

Zucamor S.A. Global Competition in Argentina

Ahmed Riaz Kiyani Ahmed Ibrar Enum Naseer Mariam Asif Muhammad Uzair Sufiyan Tariq Sultan Yousaf Haris Noman

MBA II (Section A)

Marketing Strategy Q1. Describe the evolution of Zucamor and its business strategy, particularly after the opening of the Argentine economy in 1992-93? Zucamor S.A. formerly known as Inversora Ranelagh S.A. (2007) was a vertically integrated corrugated box manufacturer. It was founded in 1951 by a group of four friends namely Dante Zucchini, Bautista, Marceliano Campo and Luis Morra. The primary operations of the company dealt with the production of various grades of paper and corrugated cardboard packages for a variety of products which included food and beverages. The company also had extensive export operations and exported corrugated boxes to neighboring countries such as Chile, Uruguay and Bolivia. Zucamor primarily operated this business with the help of contractors and sub contractors. Argentina was considered an upper-middle income country primarily engaged in the production of primary products and agricultural commodities. Manufactured goods were usually brought in from foreign countries at high costs. However after the arrival of Juan Domingo Peron as president in 1989 an era of free market economy was re-created which dealt with three pronged reform program namely, state reform, revival of market economy and promotion of investment and trade liberalization. Moreover Argentina had suffered soaring inflation from 1980s to early 1990s; fortunately inflation was controlled to 3.9% in 1994. The emergence of a new political and economic climate in Argentina coincided with the change in leadership and management at Zucamor. The companys new managing director Gustavo Herrero took charge in 1992 and his foremost decision was to involve the owners of the business into the business operations by persuading them to accept line responsibilities. Herrero streamlined numerous business practices in line with the new regulatory and economic environment such as elimination of outside the books payments. Moreover in order to enhance productivity and plant utilization Management Bonus system was initiated whereby managers and workers were provided bonuses and incentives linked to productivity gains. This system resulted in improving the productivity of the company. In lieu of the tough economic scenario in terms of rising competition, Herrero and the companys management was convinced that the way ahead for Zucamor was to seek business partnership with a global player.

Marketing Strategy Union Camp was actively seeking for a partnership in Argentina. Zucamor approached Union Camp and the deal was eventually closed on August 22, 1994. Union Camp was a leading manufacturer of paper, packaging, chemicals and wood products. The company ranked among the top 200 US industrial companies. Union Camp had been a leading exporter of Kraft linerboard to the world markets and had a strategy to expand its corrugated box manufacturing investments. Union Camps arrival in Argentina was based upon the premise of relatively stable Argentine economy especially during the 90s era. It was basically a systematic market entry process based upon seeking new markets for its products and vertical integration in order to generate higher returns and induce growth. The business level strategy of a company highlights how a business competes within its industry. A major concern in a business level strategy is the achievement of a sustainable competitive advantage over ones competitors, thus signifying distinctive competencies of a company in line with the needs and wants of its target customers. Zucamors business level strategy highlighted a limited scope because the company only catered to the industrial segment which comprised of 80% of the market. Zucamor considered the agricultural segment too risky to cater to its needs as compared to its competitor Cartocor which served the broadest markets including industrial and agricultural segments. Zucamor commanded a 12% market share in box sales. Zucamors fundamental goal was to improve the profitability of its operations which had deteriorated in recent years. According to Herrero Profitability is the goal and with this goal in mind, the company is working closely with customers to analyze their packaging needs and reduce costs.(1) In terms of resource allocation Zucamors vertically integrated operations allowed the company to produce various grades of paper along with the production of corrugated boxes and packaging. However these two operations, paper making and box making, were characterized by different scale economies. A paper making plant was capital intensive while box making on the other hand was labor intensive. Coming towards competitive advantage after the liberalization of the Argentine economy Zucamor had to face fierce competition from many local box manufacturers. These small box manufacturers were able to import virgin fibre kraft linerboard from Brazil and US at roughly the same price as Zucamors recycled liner. Compared to recycled paper, virgin paper had longer fibre length and therefore displayed higher strength for an equivalent gauge of liner. This produced a great challenge for

Marketing Strategy Zucamore as an internal survey revealed that about half of Zucamors customers bought on quality and service. Therefore in order to handle this scenario the company managed to develop a distinct competency. Zucamors distinct competency was its ability and commitment to handle individual concerns of its customers in an effective yet efficient manner. This can be exemplified through Zucamors relation with Avon. Moreover the company consistently focused upon improving its quality for its customers, this is evident from the recent agreement of Zucamore with Achilless Controlar as in 2010 Zucamor group signed a contract with Achilless Controlar (a company geared towards improving procurement productivity) to manage and verify the legal compliance of its contractors and subcontractors.(2) Zucamor achieved synergy through its vertical integration which allowed the production of different grades of paper along with corrugated boxes. Thus the company was able to utilize its own inputs for box manufacturing thereby helping to reduce costs. Q2. Trace the action that led to Zucamores association with U.S. paper giant Union Camp. In 1990 when the first generation of owners and founders of Zucamore retired a new management team took their place. Each of the new generation owners had held significant functional responsibilities in the companys operations but they decided to remove themselves from day to day operations and govern the company from their position on the board. Considering these changes Gustavo Herrero was hired as the companys new Managing Director. Herrero was believed to be a strong-minded individual who didnt hesitate to make tough decisions. As controlling costs and increasing profitability was the primary concern of Zucamore, Herrero seemed to be the most suitable option as the head of the company. After his arrival Herrero made significant decisions to improve the companys existing operations. These decisions included: Persuading the companys owners to accept significant line responsibilities within the companys operations. Elimination of off the books payments in support of the governments regularization program.

Marketing Strategy Initiation of Management Bonus system in order to improve quality, productivity and plant utilization. These decisions played a vital role in the improvement of the companys operations. However the top management realized that in order to compete effectively in the newly liberalized market environment the company must endeavor to become a world class manufacturer which would involve seeking out partnerships with key global companies. Thus after the management consensus Herrero contacted Union Camp with a proposal for an alliance. Union Camp was primarily approached because it was rumored that the company was actively looking for a partner in Argentina. Herrero also developed an association with the Union Camps chairman Craig McClelland as both individuals had studied from Harvard Business School. When Herrero approached Union Camp, the company had already signed a letter of intent with another local company so Zucamor also looked for an alternative arrangement and signed a similar letter of intent agreement with a South African paper company. However Union camps agreement with the company started falling apart and Zucamors agreement with the South African company also didnt work out. So, Norm Nelson, Vice President of International Operations in Union camp contacted Gustavo Herrero to discuss the partnership proposal once again. In lieu of the offer made by Union Camps management, Marcelo Campo and Gustavo Herrero visited three US paper companies which included Union Camp and two others. A series of questions were asked and it became clear that Union Camp was the most viable company to form an alliance. So finally Union Camp and Zucamore built a partnership where Union Camp had a minority stake of 30% and Zucamors three local shareholding families retained 70% of the equity. Q3. What were some of the critical challenges faced by the companys new management? After the retirement of the first generation owners, the next generation owners took over the control of the company. The first decision which they took after coming was to remove themselves from day to day operations and govern the company from their position on the board. Their attempt to professionalize the company turned out not to be totally success. To deal with the challenges the company was facing they hired Gustavo Herrero, 43 year old managing

Marketing Strategy director of a woolen textile mill, as their chief executive. When the new management took over the control of the company, sales were $36 million and there was also operating loss of about $1.4 million. In this regard there was a strong need that the new management should come up with corrective actions to improve the current situation. One of the major challenges which the new management was facing was high inflation present in Argentina. Argentine inflation reached a high of 4924% in 1989 then it dropped to 1344% in 1990 and then it fell to 3.9% in 1994.. The irregular trend of inflation in Argentina was also a major concern for the new management. Zucamor at that time used 100% recycled fiber as raw material for their product. This was considered to be a competitive advantage which Zucamor was enjoying but with the introduction of trade liberalization concept Zucamor was not able to differentiate itself from their competitors. Because after trade liberalization many local box plants were able to import virgin fiber kraft linerboard from paper rich Brazil and from the United States for about the same price as Zucamors recycled liner. It was not only the price which was almost same, virgin paper had longer fiber length and therefore displayed strength. Another challenge was of reducing cost in order to make sufficient profits and to survive in the industry. But the problem was this that the Customers of Zucamor were highly sensitive regarding the price and especially the quality of the product. So if Zucamor tries to reduce cost of production they have to compromise on quality which is one thing which the company cannot afford. Zucamor in this time became pretty careful in relationship building efforts with strategic accounts. So Zucamor suggested to Avon that there is a significant scope for productivity improvements in the packaging line. So in this regard Avon agreed to invest half a million dollars to revamp the picking line. So this was crucial for Zucamor because they send one full time supervisor and four operators to Avon which was paid by Zucamor. So this actually increases the cost of Zucamor which was also a very big challenge for Zucamor.

Marketing Strategy Q4. Explain the impact of globalization and market commoditization. Discuss actions to put value back into the business. Commoditization also commonly called as com modification is when company products are very similar to that of its competitors and the consumers have a hard time differentiating the products of various companies in the same industry. This happens through the processes by which goods that have economic value and are distinguishable in terms of attributes end up becoming undifferentiated goods called commodities. This concept gives rise to the practice of product differentiation, where companies try hard to differentiate their products from the competitors. The basic product remains the same but the features are changed. Globalization in this case refers to the changes in economic structures and that led to the impact on Zucamor. This includes the effect of increased competition by free economy policy by the president. Zucamor faced intense competition and had to alter the strategy to retain existing market position. The customer base that Zucamor had was different from competition and was not catering to the agricultural base. The world has become a global village and therefore it is extremely important for companies to go global if they want to survive and maximize the shareholders earnings Herrero and the board of directors of Zucamor also realized that in order to survive and grow in the newly liberalized market environment a partnership with global players is a must. Therefore they decided to partner with the union camp. Many a times globalization takes place because a company wants to benefit from resources that are available readily or cheaply in other areas. It could be labor or raw material or technology etc. for example Jefferson Smurfit acquired a small company which made paper and boxes with extremely poor equipment but they had largest of clients which were very profitable. To add value the company has to make some changes. When a raw material has no value added and quality standards are set by law or the industry, there is still plenty of opportunity for differentiation around availability, delivery, shipment quantities, payment terms, and all the other services that accompany the core product. Zucamor can do three things to counter the effect of commoditization that includes:

Marketing Strategy 1. Innovate. A new product that better meets consumer needs, even an upgrade of an existing product, can one-up competitors and force them to invest in matching or exceeding the new specifications. 2. Bundle. Selling a commoditized product with differentiated ancillary services (such as aftersales service) can appeal to buyers willing to pay a premium for the convenience. 3. Segment. Mature markets are large markets that can be divided profitably into multiple segments. Marketers can focus on providing applications expertise for less price-sensitive customer segments for whom the product is still important.(3)

Marketing Strategy References

1. http://www.risiinfo.com/db_area/archive/ppi_mag/1999/9908/ppi2.htm 2. http://www.achilles.com/en/Achilles-Chile/news/Zucamor-joined-Controlar-at-Achilles-

Argentina/
3. http://hbswk.hbs.edu/item/5830.html