FACULTY OF BUSINESS AND ECONOMICS

ASSESSMENT COVER SHEET

Rizky Shampitha Surya

Students name

Wibowo

ID number

26570300

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+61435008368

Unit name

Strategic Management

Unit code

MGX 5976

Title of assignment

The Importance of Internal Factors for Nordic Sawmills

Lecturer/tutor

Andrew Laurence Cavanagh

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Date submitted 10/9/2015

Due date 11/9/2015

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The Importance of Internal Factors for Nordic Sawmills

Strategic management have been interested in the drivers of firm performance (McGahan, 1999).
Increasing global competition, rapid technological change, substitutes, and expanding customer
expectation have been said to be the the cause of environment turbulence in the sawmill industry
(Husso & Nybakk, 2010). As a result, a number of empirical studies have talked about
performance drivers in the forest industry (Bonsi, Gnyawali, & Hammett, 2008; Bull &
Ferguson, 2006; Stendahl, Roos, & Hugosson, 2007).
These empirical studies indicate two main perspectives of performance drivers, the resource
based perspective (Barney, 1991; Wernerfelt, 1984) and the industrial organization perspective
represented by Porters five forces (Porter, 1980;1991). Porters five forces argues that
competitive advantage is related to a firms ability to implement broad generic strategies within
an industry (Porter, 1980), while the resource based perspective view examines the resources and
capabilities that allow firms to achieve a sustainable competitive advantage (Amit &
Schoemaker, 1993; Oliver, 1997). In other words, the Resource Based View (RBV) focuses on
the internal environment as opposed to the external environment focus of Porters five forces.
This essay aims to argue that the RBVs internal environment is the most important performance
driver to achieve competitive advantage due to the firms ability to shape its internal environment
to tackle external problems using Nordic countries SME sawmills as an example. The first
section contrasts RBV and Porters five forces framework. The second section uses Porters five
forces framework to analyze the external environment of small and medium sized (SME)
sawmill industry in Nordic countries and the third section will cover different ways in which
Nordic sawmills uses their internal resources and capabilities to counter the external environment
followed by a conclusion.

The first section covers RBV and Porters five forces framework. Porters five forces is one of
the most popular framework to analyze environment factors in relation to the firms performance
(Hoskisson, Hitt, Wan, & Yiu, 1999). Michael Porters five-forces framework uses an outside-in
perspective (Husso & Nybakk, 2010). The reason for using Porters five forces is that the
industrys environment is a factor that influences the firms profitability (Porter, 1981). Porter
(1991) also stated that this industry environment framework can be applied at the industry level
by groups of firms with similar strategies (strategic group) or even at the level of the individual
firm (Porter 1991). Porter (1980) focuses on the threat of new entrants, the bargaining power of
buyers, the bargaining power of suppliers, the threat of substitute products or services, and
rivalry among existing firms as forces that drives the competition within an industry.
The RBV traces back to Penroses (1959) analysis that postulates the firm as a collection of
productive resources, however it become widely known through Wernerfelts (1984) article on
RBV. RBV uses an inside-out perspective (Husso & Nybakk, 2010). The RBVs posits that the
industrys variation in competitiveness is based on each firms unique resources and capabilities
(Barney, 1991; Wernerfelt 1984). Grant (1991) divides resources into financial, physical, human,
technological, reputation, and organizational resources, while Collins and Montgomery (1995)
divides resources into tangible and intangible resources. RBV only focuses on resources that is
valuable for strategic purposes (Husso & Nybakk, 2010). To be a resource that is valuable for
strategic purposes it must be valuable, in a sense that it enables a firm to improve its market
position relative to competitors, rare, in a sense that it must be valuable to sustain competitive
advantage, isolated from imitation or substitution, and immobile and costly to imitate or to
replicate or the VRIO framework (Barney, 1991; 2001).

The second section will cover an external environment analysis using Porters five forces
framework in Nordic countries SME sawmills. The external environment focuses on threat of
new entrants, the bargaining power of buyers, the bargaining power of suppliers, the threat of
substitute products or services, and rivalry among existing firms as forces that drives the
competition within an industry (Porter, 1991). The threat of new entrants for the Nordic SME
sawmills arises from lower cost countries such as the Baltic States, Russia and other countries in
Central and Eastern Europe (Spelter, Kozak, & Burdin, 2004). Some of these countries are new
European Union (EU) members. Their EU membership provide further advantages that tended to
their competitiveness from savings in transport time due to border deregulation, the facilitation
of value-added tax procedures, the removal of possible anti- dumping duties, access to EU
structural development funds for industrial development, consistent quality and trade regulations,
and increased market information (Spelter et al, 2004).
Nordic countries sawmills have long been identified as a producer of good quality woods with
prices that is equivalent to its quality, however the IKEA phenomenon that emphasized low
quality woodwork with the lowest possible labor affects the profitability of Nordic SME
sawmills (Spelter et al, 2004). Buyers demand cheaper woods on their furniture. Although the
furniture industry has used relatively small volumes compared to the total production of Nordic
sawn lumber, decreasing margins in the furniture industry together with the increasing bargaining
power of large retail furniture chains have led to price erosion (Husso & Nybakk, 2010).
The bargaining power of suppliers arises from the fact that in a mature industry like sawmilling,
where growth is low, true product prices are declining and the main input prices often fail to
follow the sawn lumber price trends (Husso & Nybakk, 2010). This emphasizes the bargaining

power of integrated log companies that is also a competitor in the sawn lumber market. This led
to low profitability and scarcity of investments which resulted in low productivity.
The threat of substitute product comes from concrete, steel, and engineered wood products
(EWP). Concrete and steel have historically been a substitute for wood as a material, while
EWPs competitiveness comes from its low cost raw materials and large scale production
technology as opposed to Nordic countries good qualitied logs that grows slowly (Hansen,
Nybakk, Bull, & Crespell, 2011).
Consolidation within the sawmill industry has led to a shift towards fewer and larger
competitors. Especially in Finland where the three biggest producers are responsible for half of
Finlands sawn lumber (Spelter, et al, 2004). This type of industrial evolution is strategically
important because it impacts the sources of competitive advantages for Nordic sawmills (Husso
& Nybakk, 2010).
SME sawmills have taken these external factors as given; they do not believe that they can
influence these factors (Hansen et al, 2011). The only solution is to focus on internal issues and
shape their firms resources and capabilities in a way that develops competitive advantage
(Husso & Nybakk, 2010).
The third section analyze how Nordic countries SME sawmills use their internal resources and
capabilities to counter the external factors using RBV and Barneys (2001) VRIO framework.
The need for new strategic decisions may arise because of external factors, but strategic
decisions are made as a consequence of internal resources and capabilities (Husso & Nybakk,
2010). Sawmills try to seek competitive advantage by utilizing their resources and capabilities
(Hansen et al, 2011). This section uses Husso and Nybakks (2010) data on five sawmills in the
Nordic countries. Table 1 shows the characteristics of the sawmills.

Table 1: Characteristics of SME Sawmills in the Nordic Countries

Nu
m
1.

Sawmill Name

2.

Sawmill B

3.

Sawmill C

4.

Sawmill D

5.

Sawmill E

Sawmill A

Characterisitics
Operations cover whole value chain despite the small size
Invested on band saw line
Agreement with sawn lumber middleman
Main product: sawn lumber spruce
Vast financial resources
Open minded and willing to learn employee
Intensive investment program
Main product: sawn lumber pine and spruce (pine dominates)
Close proximity to customer and supporting industry
Main product: sawn lumber spruce and pine (spruce dominates)
Small invesment
Low financial resources
High-quality raw material
Main product: sawn lumber spruce
Traditional sawmill
Relation with roof trusses industry
Minimum investments in new equipment
Maintaining old equipment and increasing its efficiency
Source: Husso and Nybakk, 2010

To counter the threat of low cost new entrants in the sawmill industry, sawmill A specializes in
thin sawn lumber. During the mid 90s theres a boom of investing in the circular saw line in the
sawmill industry, however sawmill A invested on the band saw line. The band saw line can
produce flimsy center-yield sawn lumber of less than 25-mm thickness that cannot be produced
using the circular saw line. This is in accordance with VRIO frameworks rarity principle. By
specializing in thin sawn lumber, sawmill A can also reduce the rivalry among existing firms.
Sawmill A also tries to increase its market share by using the service of sawn lumber middleman
in their marketing. Lumber middleman have better market knowledge and able to find customers
that are willing to accept slightly higher prices, however sawmills rarely uses the service of
lumber middleman. This is caused by high commission demands from the middleman. Sawmill

A have an agreement with the middleman on reduced commission demands. Thus, this
relationship can be considered as a valuable internal capabilities coming from the organizations
marketing.
Sawmill B took a different approach. Intensive investments are carried out by sawmill B to
modernize its manufacturing line to increase its efficiency using its vast financial resources.
Financial resources have been especially important not only for investment funding but also as a
resource that helps with risk management (Hansen et al, 2011). In implementing change, firms
are faced with their employees reluctance in using new technology (Peteraf, 1993), however
sawmill B has open-minded employees that greatly reduce the complexity of implementing a
new system. The employees willingness to learn also greatly reduced training costs.
Internal physical resources that arises from geographical location is also important to compete
with low cost new entrants in the sawmill industry. Sawmill C is located near the Russian border,
the Helsinki region and in close proximity with sawmill equipment repair industry. Most of
Nordic sawmills customers from the construction industry are from Russia and Helsinki, thus
this geographical advantage influenced in and out-bound logistics. Competitive advantage comes
from cost reduction that arises from close proximity to sawmill Cs customers. Furthermore, the
close distance between sawmill C and the sawmill equipment repair industry also reduced
maintenance cost that can provide more competitive pricing.
Sawmill Ds geographical location that is close to its main raw material (high quality spruce)
have different impact on its strategy. Sawmill D is competing with sawmills in close proximity to
acquire its raw material. Most of its competitors relies on big diameter spruce. To reduce the
cost of acquiring raw materials, sawmill D decided to focus on manufacturing small-diameter
spruce that is low in demand. Spruce logs with a diameter that is not more than 23 centimeters

can still be processed using sawmill Ds circular saw line. Thus, sawmill D does not need to
invest on band saw line. This in turn led to cost competitiveness.
Sawmill E main customer comes from the roof truss industry. Due to low demand in roof trusses,
sawmill D have to be very efficient and cost effective. Sawmill D pursue efficiency by going
through its production process to evaluate what it can do with the technology that they already
owned and improve its efficiency with minimal investments.
In conclusion, threats for the Nordic sawmills comes from new low cost entrants from Baltic
States, Russia, and Central and Eastern European countries that draws their low cost competitive
advantage from their EU membership, the demand of cheaper products from the buyers,
expensive raw material demand from the suppliers, and the threat of concrete, steel, and EWP as
substitute products. Low existing competitors can be considered as an opportunity. Using the
external environments threat of new entrants as a basis for analysis, it is found that different
sawmills devise different strategies using their unique internal resources and capabilities. This
finding strengthens Husso and Nybakks (2010) opinion that strategic decisions may arise
because of external factors, but strategic decisions are made as a consequence of internal
resources and capabilities. Thus, confirming that internal factors are indeed a more important
performance driver than external factors.

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