AbitibiBowater Seeking Sustainable Competitive Advantage

Case Type: business competition/competitive benchmarking.
Consulting Firm: IBM Global Business Services (GBS) 2nd round job interview.
Industry Coverage: forestry, timber & paper products.

Case Interview Question #00322: The client AbitibiBowater Inc. (TSX: ABH, NYSE: ABH) is a timber, pulp and paper manufacturer headquartered in Montreal, Quebec, Canada, formed by the merger of Bowater and Abitibi Consolidated in 2007. After the merger, AbitibiBowater becomes the third largest pulp and paper company in North America in terms of revenue and manages the largest area of publicly owned forestland in Canada.

The client AbitibiBowater Inc. processes trees from the forest to make timber products (e.g., plywood, pulp, paper, etc). They have been making more profits than their direct competitors and do not understand this phenomenon. You have been hired by the Chairman of AbitibiBowater to find out the reason. Why have they been making extraordinary profits? Is their competitive advantage sustainable?

Possible Solution:

This is a business competition case that requires the candidate to analyze client’s competitive advantage. I started my analysis with a profitability framework: Profits = Revenues – Costs.

Candidate: You say our client is making more profits than their competitors. Are we also making higher profit margins?

Interviewer: Yes. If our margins are higher, then, for each item sold, our average price is higher than that of our competitors and/or our average total costs are lower than those of our competitors.

Candidate: In that case, let’s focus on prices first, and I will come back to costs later. How high are our prices, relative to those of our competitors?

Interviewer: What do you think?

Candidate: Timber products are commodity goods. I assume, then, that our prices are comparable to those of our competitors?

Interviewer: That’s a fair assumption. Let’s shift to costs.

Candidate: Now moving over to the cost side, how do our costs compare to those of our competitors?

Interviewer: Our costs are lower.

Candidate: Costs = fixed costs + variable costs. Let’s explore variable costs first. Are our labor costs the same?

Interviewer: The hourly rate that workers are paid is comparable throughout the industry. Assume that labor skills are comparable, as well.

Candidate: And raw material costs?

Interviewer: In Canada, the timber companies own their own natural resources (forests). Let’s assume that the costs of growing and cutting down any given tree are comparable throughout the industry.

Candidate: How do our transportation costs compare?

Interviewer: There is not much of a transportation difference between the forests, the mills, and the point of sales.

Candidate: Let’s look at fixed costs then. Can you tell me a bit about the client’s fixed costs.

Interviewer: Assume that we use the same equipment as our competitors.

Candidate: From what you’ve said, it seems like the cost of processing any given tree would be the same for us as they would be for our competitors. Is that correct?

Interviewer: That’s a fair assessment. Pull back and look at the big picture.

Candidate: If our prices on finished goods are the same, and our processing costs per tree are comparable, then the only way we could be making superior profits would be if our output per tree were higher than that of our competitors. Is that the case?

Interviewer: Yes. On average, our timber company has thicker trees in their forests than their competitors. They can get a higher yield for the same amount of processing time, meaning a lower processing cost per unit.

Candidate: Based on what you’ve said, then, our client seems to be experiencing above average profits because it enjoys a lower processing cost per unit. The next question it might explore is whether that is a sustainable competitive advantage.

Interviewer: Excellent. I think we’re running out of time. Let’s just stop here. Do you have any questions for me?

Interviewee’s Comments:

The timber industry produces commodity goods. You may want to think about the steps in the value chain and analyze differences between competitors at each step. Obviously, the difference in yield per tree is the “blinding insight” for this case. This case is harder than most, not because it is particularly difficult, but rather, because you figuring out that the “blinding insight” is really a hit-or-miss proposition.

Note: This case is very similar to the “Why International Forest Products Makes So Much Money” case. So, you may also want to check out possible answers to that case too.